Too Much Debt and Budget Deficit on Fiscal Sustainability: Do Institutions Matter?

Authors

  • Cahyadin Malik Universitas Sebelas Maret & Universiti Kebangsaan Malaysia
  • Sarmidi Tamat Universiti Kebangsaan Malaysia & Universitas Negeri Malang
  • Khalid Norlin Universiti Kebangsaan Malaysia
  • Siong Hook Law Universiti Putra Malaysia

DOI:

https://doi.org/10.22452/MJES.vol59no2.5

Keywords:

Fiscal sustainability indicator, public debt, budget deficit, institutions, dynamic panel threshold

Abstract

The current study estimates threshold levels of the public debt-to-gross domestic product (GDP) ratio and the budget deficit for 106 developing and 36 developed countries from 1996 to 2018. A PCA-based fiscal sustainability indicator is also constructed and a dynamic panel threshold regression is employed. The main findings reveal a threshold effect in the public debt-to-GDP ratio and budget deficit fiscal sustainability nexus. The public debt-to-GDP ratio and budget deficit are beneficial in maintaining fiscal sustainability at lower or upper threshold levels in different institutional indicators. The highest threshold level of the public debt-to-GDP ratio was 59.56% for developed countries and 64.87% for developing countries. The highest threshold level of budget deficit-to-GDP ratio was 0.41% for developed countries and 3.34% for developing countries. Three institutional indicators contribute significantly to the threshold estimation: regulatory quality, the rule of law and control of corruption. Policymakers are advised to maintain certain threshold points to ensure a fiscally sustainable level. The quality of law enforcement and control of corruption should also be improved.

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Author Biographies

Cahyadin Malik, Universitas Sebelas Maret & Universiti Kebangsaan Malaysia

Department of Economics, Universitas Sebelas Maret, Surakarta, Indonesia

School of Economics, Universiti Kebangsaan Malaysia

 

Sarmidi Tamat, Universiti Kebangsaan Malaysia & Universitas Negeri Malang

School of Economics, Universiti Kebangsaan Malaysia

Khalid Norlin, Universiti Kebangsaan Malaysia

School of Economics, Universiti Kebangsaan Malaysia

Siong Hook Law, Universiti Putra Malaysia

Department of Economics, Universiti Putra Malaysia

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Published

2022-12-26

Issue

Section

Articles