Impact of Tax Revenue and Government Expenditure on Public Debt in Eastern Europe

This paper scrutinizes whether government borrowing in Eastern Europe is grounded on the need to provide infrastructure and public amenities as provided in the budget or is triggered by government deficit budgeting. European Union countries have experienced accelerated growth in public debt in the last half a century despite growing tax revenue and cuts in public spending. The purpose of this paper is to investigate the direct and indirect links among public debt, tax revenue and government expenditure in four Eastern European member states from 1998 to 2022 using secondary statistics collected from the World Bank and Eurostat. The paper utilizes a fully modified ordinary least squares (FMOLs) approach and Dumitrescu-Hurlin causation tests to examine the long-run relationship between the factors. For the robustness check, the Levin-Lin-Chu (LLC) unit root test was used to specify the stationarity of each series. In addition, Kao cointegration estimation was used as a robust long-run estimator. The results indicate that directly, a reduction in tax revenue and an increase in government spending increase public debt in the long run. Indirectly, simultaneous tax revenue increase and government spending increase will lead to budget deficit cuts, which will in turn reduce public borrowing. The finding confirms that the adverse impact of public spending on government debt holds only for countries with less tax revenue collection. The study recommends that government and policymakers develop strategies and policies for long-term debt management geared at reducing public debt to match the gap between tax revenue and government expenditure thereby cutting endless public borrowing and anticipated budget deficit.