The Effect of Sovereign Debt on Economic Growth and Economic Development

Abstract

Researches focusing on the effects caused by growing sovereign debt of developed countries on economic growth gained new momentum in the past few years. One half of the empirical studies concludes that the rising debt slows down the pace of economic growth, while the other half of the analyses says this rule works only above a fix rate of the proportion of debt to GDP. Our linear regression study based on the most recent data of EU-27 countries reveals that a one percentage point increase in the debt to GDP rate causes a slowdown of 0.027 percentage point in the rate of the economic growth, while in new member states joining the EU in 2004 or later the degree of such an effect is higher (0.041 pp). However, with respect to long-term effects of public debt on economic development we realise that in the years preceding the economic crisis the ’optimal’ rate of sovereign debt to GDP was 68 per cent, which has risen to 86 per cent by 2012. According to our calculations the cut in the GDP-proportionate rate of the expenditures on education sets back economic growth.