The Relationship Between Fiscal Consolidation and Sovereign Debt – Does Fiscal Correction Decrease or Increase Debt Rate?

Abstract

Today, the global economic environment can be described as “gracious”. The macro-economic framework created by in-terest rates close to zero and global excess liquidity enables the financing of high sovereign debt positions under market conditions. On the other hand, reducing sovereign debt as soon as possible is a necessary and indispensable economic policy measure. The study looks at the role of fiscal consolidation in debt reduction. Debt rate can be reduced in two main ways: by increasing the primary balance or through economic growth. Due to the Keynesian mechanisms of action, fiscal correction requires growth sacrifice, which may decrease or completely eliminate the positive effects of corrective measures. Corrective measures focusing on the revenue or the expenditure side may have different effects on output and debt reduction, depending on their degree, duration and nature. Based on the review of scientific literature and statistical analyses, it can be stated that the growth effect plays a key role in reducing the debt rate. In addition, the criteria for success include favourable economic environment, a low fiscal multiplier, and also identifiable steady expenditure-side measures.