Corruption as a factor of fiscal unsustainability

Abstract

The impact of corruption on public finances is a critical issue affecting the economic stability of countries. Corruption decreases tax revenues, redirects resources towards unproductive expenditures and, consequently, increases public debt levels. The main objective of the study is to quantitatively assess the impact of corruption on public debt levels in a panel of 135 countries between 2002 and 2020 and to identify the transmission channels. The empirical model is based on a dynamic panel model that uses the generalized method of moments to address endogeneity, with explanatory variables related to corruption, expenditure and economic development. The results indicate that corruption reduces tax revenues and redirects resources towards unproductive expenditures, which increases public debt. In addition, it is observed that the impact is particularly strong in countries with abundant natural resources. It is concluded that an increase in corruption contributes significantly to financial instability and public indebtedness.