Impact of Public Debt on Public Education Expenditure: Does Institutional Quality Matter?

Abstract

This study investigates how institutional quality influences the relationship between public debt and education expenditure. Using data from 145 advanced and developing economies, over the period 1994 – 2022, we employ System GMM and dynamic panel threshold regression models to capture both linear and nonlinear dynamics. The System GMM results indicate that higher levels of public debt are associated with reductions in education expenditure, whereas institutional quality has a significant positive effect. Notably, the interaction between public debt and institutional quality increases education expenditure. The threshold regression further reveals a regime-dependent effect: when the institutional quality index is below 1.231, public debt significantly reduces education expenditure. However, when institutional quality surpasses this threshold, public debt increases public education expenditure. These findings highlight the critical role of institutional quality in shielding educational budgets from the adverse effects of rising debt. Accordingly, policymakers are urged to strengthen institutional frameworks and prudently manage public debt to sustain investment in education.