Public debt and fiscal consolidation in the Western Balkans: a panel analysis of growth effects

This study examines the impact of public debt on economic growth and the effects of fiscal consolidation efforts in the Western Balkan countries (WB6)—Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia. Utilizing a dual methodology of descriptive and panel data analysis, the research investigates whether higher public debt adversely affects economic growth and if fiscal consolidation measures lead to improved economic outcomes. The descriptive analysis identifies fiscal consolidation periods based on improvements in the cyclically-adjusted primary budget balance and subsequent changes in the public debt-to-GDP ratio. The econometric analysis employs both fixed-effects and random-effects panel regression models, using data from International Monetary Fund (IMF) - World Economic Outlook Databases covering the period 2000-2023. The findings reveal that higher levels of public debt are detrimental to economic growth across the WB6 countries. Conversely, successful fiscal consolidation, characterized by reductions in government expenditure relative to GDP, correlates with enhanced economic growth. The study underscores the importance of maintaining prudent debt levels and implementing effective fiscal policies. Recommendations for policymakers include prioritizing debt reduction strategies, improving revenue collection, and investing savings in infrastructure, education, and innovation to support long-term economic stability and growth.