Optimal public debt level and size of the public sector evidence from developed and developing countries including Sri Lanka

Abstract

Attached

Research on fiscal policy and public debt has been increasing due to indebtedness of many countries at national level. A lot of countries including both developed and developing have run into massive debt. Any country may run into debt especially in time of natural disasters, wars and sudden economic crises. However, the majority of nations borrow money to perform their role of the state or government. Continuous borrowing accumulates into an unsustainable amount of debt. Therefore, discussion on optimal level of public debt needs to be broadened. Secondly, borrowing may pave the ways to an expanded public sector. This study, examines the relationship between public debt and economic growth, and analyzes optimal level of public borrowing and influence of national borrowing on the size of the public sector. These objectives are achieved by developing models, analyzing the relationships of national debt in developed and developing countries with their per capita income and size of the public sector. Both econometric and qualitative analyses were conducted in the light of secondary data. The study finds that high levels of debt offers a target of high growth to developed countries and contributes to expand the public sector in both developed and developing countries. Debt threshold for developed economies depends on payability of loans of those countries. Among developing countries, Sri Lanka is one who is going forward with a significant growth by decreasing its national debt levels and so controlling the expansion of the public sector.