Academics warn on government debt

By: Anish Chand

Research from two University of the South Pacific academics concludes Government debt could negatively impact economic growth prospects in Fiji.

In their paper titled Public Debt and Economic Growth: Empirical Evidence from Fiji, Dr Neelesh Gounder and Janesh Sami have examined statistics on public debt and economic growth to reach this conclusion.

“This empirical study undertook a time series analysis of the long-run and short- run impact of public debt on economic growth in Fiji over period from 1970 to 2014. These results directly contribute to current debate on the implications of rising public debt on economic growth in Fiji,” the academics state.

The study finds that public debt has a negative impact on economic growth in the long-run and short-run.

“With Fiji is enjoying positive economic growth rates over the recent years, our analysis suggests that escalating public debt level may constrain the ability of the economy to maintain the growth momentum,” Dr Gounder and Sami conclude.

“Our finding points outs that a careful assessment of future government spending is crucial for economic growth in Fiji,” the USP academics say.

The research says its prudent to start focusing now than later to avoid creating conditions that cause economic growth to weaken.

“While government spending adds to infrastructure and builds human capital, the real burden on the future generation is the current government spending which increases the debt stock. This could have future economic consequences,” Dr Gounder and Sami conclude.

The academics recommend that the current and any future government should implement a sincere medium to long-term plan to reduce debt accumulation.

“This calls for greater emphasis on fiscal transparency, good governance and a stronger institutional framework towards fiscal discipline. Government spending and taxation strategies indicate that the government continues to experiment with a low tax regime,” the academics state.

The limits of that strategy will inevitably give way to higher taxes to meet debt financing, the USP research paper finds.

“One major limitation of this study is that it has focused on Fiji only. Future studies can extend this present study and examine the impact of public debt on economic growth in other Pacific Island Economies as well as the different channels by which public debt hampers economic growth,” Dr Gounder and Sami conclude.