Fiscal vulnerability in small states: shocks, debt dynamics, and policy responses

Small states face structural constraints that amplify fiscal vulnerability to shocks, particularly natural disasters and global downturns. Using data for 35 small states from 2000–2023, this paper quantifies the fiscal impact of major shocks, decomposes public debt dynamics, and assesses governments’ responses to rising debt. We find that natural disasters and global recessions are associated with substantial fiscal deterioration while persistent primary deficits are a key driver of debt accumulation. Meanwhile, fiscal reaction functions indicate limited policy adjustment to higher debt. The results underscore the importance of strengthening fiscal frameworks to enhance resilience to large and recurrent shocks.