Abstract:

The main purpose of the paper is to understand the nature of the relationship between rising public debt and future economic growth. Moreover, the article aims at determining whether the character of this relation-ship is the same or different when considering “new” and “old” members of the European Union. The abovementioned issues are analysed using two approaches: the introduc-tory comparative analysis (Reinhart-Rogoff approach) and econometric methods (pooled regression, between es-timator, cross-country regression and fixed-effects regression). The sample considered consists of EU countries (as of 1st January 2020) and various economic, demographic and societal data coming from the period 1995-2019. The findings show that public debt expansion may have some positive effects on economic growth, but only up to a certain limit. Having reached this limit, the negative outcomes start outweighing positive ones, and as a result, the growing public debt diminishes subsequent economic growth, leading possibly to a debt trap. It is also confirmed that this limit is lower for the “new” EU members when compared to the “old” ones.This article may be treated as a warning against excessive debt expansion as it undermines future economic development.  The paper is relevant as it shows a nonlinear impact of rising public debt on future growth. It may serve as a guide proving that fiscal deficit and debt-driven economic development is not a sustainable one, especially if considering countries trying to eliminate the economic development gap between them and the leaders.