The influence of public debt on the performance of the economy

Abstract

Thanks to public debt, nations maintain a stable tax rate and at the same time raise expenses for suppressing budget crises. Public debt is considered risk-free and is issued by the national government. However, extensive public debt raises interest rates, extrudes private investments, worsens fixed balance, widens short-term fluctuation and has a negative impact on economic growth. The performance of the economy can be measured mostly by GDP, which is expressed as the monetary value of all finished products and services produced in a certain time period in one country. The aim of this paper is to explore the relationship, or rather identify the mutual correlation of public debt of one country and its performance (GDP). The research includes countries of the European Union, which have an identifiable timeline of public debt and GDP. The source of this data is the database of the World Bank. The information is from the period of years from 1995 through 2015. The correlation of the whole file of countries and then individual countries is ascertained. On the basis of the results, we can state that in the explored sample of countries, high dependence between public debt and GDP has been proven.