The impact of public debt on economic growth: determining of factors and their interactions

This article suggests that the expenditure multiplier and the interactions among its key components can help explain whether increasing public debt encourages or inhibits economic growth. As per the theoretical underpinnings of the effect of debt on growth, its influence is observable in regard to private consumption, import and investment. The size of the expenditure multiplier depends on factors like the tax rate and the marginal propensities to consume, import, and invest – each influencing the multiplier differently. Specifically, the effect is positive in relation to marginal propensities to consume and invest and negative in relation to the tax rate and marginal propensity to import. Our findings show that in countries with relatively lower government effectiveness, debt has a greater impact on growth, mainly due to higher tax rates rather than high import levels. Conversely, in countries with higher government effectiveness, the influence of debt on growth remains similar regardless of tax rates, if the propensity to import is low. In cases where the public sector dominates the economy, the impact of debt on economic growth is determined by factors other than the multiplier effect.