FISCAL SPACE DIVERGENCE OF UKRAINE: DEBT FATIGUE RISKS

Abstract

Restrictions on the use of fiscal instruments due to high level of public debt have affected the fiscal spaces of many countries. The issue of forming a sufficient fiscal space in Ukraine is extremely relevant in the context of global financial uncertainty, unavailability of new borrowings and acceleration of the COVID-19 pandemic.The study summarizes existing narratives and theoretical and methodological approaches to an important economic category of a fiscal space. The fiscal space is analyzed as the difference between the current level of country`s public debt and its debt limit.The aim of the study is focused on empirical assessing the fiscal space, studying the dynamics of Ukraine’s public debt, its ratio to GDP, and an empirical analysis of the relationship between growing public debt and economic growth, primary budget balance in Ukraine during 1995-2019, calculating the fiscal reaction function, as well as identifying possible risks of fiscal fatigue based on analysis fiscal response function.The authors confirmed a negative correlation between public debt and economic growth for Ukraine based on regression analysis of the data set in 1995—2019. It is revealed that the basic obstacle to the creation of sufficient fiscal space in Ukraine is unacceptably high rates of servicing sovereign debts against the background of insignificant or negative GDP growth rates.The debt fatigue risks were emphasised. Fiscal fatigue or depletion was assessed as a specific stage of insensitivity of public finances to the growth of public debt. It is proposed to restrain further unjustified increasing of public debt, to abandon the use of risky instruments to avoid fiscal fatigue. Fiscal rules aimed at fiscal sustainability and efforts to expanding the fiscal space can be considered as an acceptable fiscal policy.