That Squeezing Feeling: The Interest Burden and Public Debt Stabilization
31 Pages Posted: 18 Jun 2013
Date Written: May 2013
The paper explores the extent to which the pressure of debt service on other spending items may push governments to embark on fiscal consolidation beyond what is strictly necessary to secure solvency. The empirical analysis identifies thresholds of interest bill indicators beyond which governments appear to shift to policies aimed at durably curbing the debt trajectory. Hence, in the current context of high inherited public debts, countries experiencing rising borrowing costs and interest payments would be more likely to enact more aggressive fiscal consolidations than warranted by strict solvency concerns. Conversely, those benefiting from persistently low interest rates despite rising debt stocks would likely opt for a more gradual fiscal consolidation path than what solvency considerations would normally dictate.
Keywords: Public debt, Debt burden, Interest rates, Fiscal consolidation, Government expenditures, public debt, interest payments, fiscal consolidation., fiscal reaction, fiscal policy, fiscal reaction function, government revenue, debt service, fiscal reaction functions, fiscal consolidation, fiscal behavior, fiscal space, tax revenues, tax revenue, interest expenditure ratios, interest expenditure, fiscal prudence, budget constraint, expenditure ratios, fiscal adjustment, budget balance, fiscal policy response, public spending, public expenditures, fiscal variables, annual budget, taxation, national fiscal rules, fiscal impact, fiscal retrenchments, budget balances, primary expenditure, fiscal devel
JEL Classification: E62, E63, H62, H63
Suggested Citation: Suggested Citation