Interest Payments on Public Debt and the Quality of Public Finances

In this paper we aim to study the effects of interest spending on public debt on the quality of a country’s public finances, in Romania and other developed and developing countries. Two different approaches have been taken into consideration. On the one hand, we showed that, when public indebtedness fails to promote economic growth and no compensatory measures are taken by governments, as budgetary expenditures raise and no additional ordinary revenue are available, government budget balances deteriorate and public debt further accumulates. On the other hand, it resulted that, when compensatory consolidation measures are undertaken in order to keep budget deficits and public debt under control, taxes are raised or public expenditures are reduced. As public capital expenditure is most often sacrificed, this alters the quality of public spending, due to the lower share of growth-enhancing expenditures.