







































AGORA INTERNATIONAL JOURNAL OF ECONOMICAL SCIENCES, 
AIJES, ISSN 2067-3310, E - ISSN 2067 – 7669, VOL. 13 (2019) 

 

Increase of Public Debt and Budget Deficit and their Sustainability 

Rica Ivan1, Călin Tănase Ladar2  

1Faculty of Electrical Engineering and Information Technology, University of Oradea, Str. 

Universității, nr. 1, Oradea, Romania 
2Faculty of Environment Protection, University of Oradea, Str. Universității, nr. 1, Oradea, Romania 

E-mails rika_ivan2005@yahoo.com, ladarcalin@yahoo.com   

Abstract 
Taking into account the need to ensure a standard of living adequate for citizens, by providing jobs, infrastructure, 

housing, etc., governments seek to allocate resources for that purpose, most often exceeding the ability to collect 

revenues to state budget and thus leading to accumulation of budget deficits and, implicitly, to increased public 

debt. Economic growth is the most important instrument for achieving the social and economic objectives of a 

central government. All these elements aforementioned intertwine with the external economic environment, the 

evolution thereof, while negative effects such as the economic crises have a contagious effect on the economy and 

society in general. After the economic and financial crisis of 2007, the public debts of the states increased, and 

the sustainability of the public finances has become a matter of major concern. 

Keywords: public debt, budget deficit, economic growth, debt crisis, European Union, sustainability. 

 

1. Introduction 

The first economist who addressed the issue of financing government spending through loans 

or by raising taxes and levies was David Ricardo, who in his fundamental paper "Principles of 

Political Economy and Taxation" advocated for debt neutrality, because taxpayers should be 

aware that loans accumulated in time by the government shall lead to tax increases in the future 

(Kishtainy, 2012). This theory, whereby budget deficits were considered hazards since they led 

to economic ruin, was seriously challenged by the Great Crisis of 1929-1933, at which point 

John Maynard Keynes argued that overcoming economic crisis can only be achieved through 

state intervention in the economy, and this intervention entails making loans and an increased 

budget deficits in order to stimulate public spending, which will create thereafter jobs creation 

and implicitly will support economic welfare. Nowadays there are still supporters of the theory 

of debt neutrality, such as economists Robert Barro, Robert Lucas and Thomas Sargent who 

belong to the new school of classical macroeconomics, as well as supporters of Keynesian 

theory, such as Hyman Minsky and Paul Krugman. 

As we have shown above, the central topic of the supporters of the neoliberal macroeconomics 

school is fiscal prudence according to which governments should not spend more than they 

collect, since spending more than the budgetary revenues generate inflation and undermine 

economic stability, which affects economic growth and decrease the standard of living of those 

with fixed incomes. The supporters of the neo-Keynesian economics argue that the public 

budgets must be balanced, but not on annually basis, but following an economic cycle, since it 

is necessary to make some extra-budgetary expenses during the economic downturn and to 

generate budget surplus during the upward trend in a country. It is normal for a developing 

country to make medium-term extra-budgetary spending on a steady basis as long as the debt 

is sustainable (H.J Chang, 2012). 

 

2. Definitions 

mailto:rika_ivan2005@yahoo.com
mailto:ladarcalin@yahoo.com


2 

 

The term public debt generally refers to the debt of a country made as a result of contracting 

loans by central and local governments from legal and natural persons residents in the territory 

of that country or abroad and which are to be repaid at a certain time. Thus, the public debt can 

be external or internal, and its structure differs depending on development level of a country. 

Thus, in the economically developed countries the internal debt has a larger share in the public 

debt, while in the less developed countries the external debt has a higher percentage in the 

public debt. 

There is no single definition of public debt for which there several approaches, both in the 

narrow and the broader sense. According to the National Bank of Romania (NBR) and the ESA 

2010, Government debt is defined as the total consolidated gross debt in nominal terms at end 

of period for the following categories of government liabilities (defined in ESA2010): currency 

and deposits, securities other than shares excluding financial derivatives, and loans. 

The public debt is correlated with a country’s budget deficit. States are looking to contract 

loans, in particular, to finance the government's budget deficits. According to the NBR, the 

government deficit/ surplus is the net financing requirement for the running of the public 

administration. 

The debt of a country is formed by the sum of the debts generated by the central and local 

governments of a state, and by the public and private companies that operate in a national 

economy. Public debt is a necessary tool for governments to finance public spending, especially 

during periods when there is no possibility to increase taxes or to reduce public spending. 

Increasing a country's public debt can lead to economic instability and even generate economic 

downturn. A high level of public debt in GDP is perceived as an economic problem by investors 

and policy makers, because it can negatively influence the capital market and can trigger 

decreased investments, reduced employment and negative economic growth (Coccia, 2018). 

The public financial imbalance is underpinned by the budget imbalance. The public financial 

imbalance occurs as a result of the increased demand for financial resources in relation to the 

revenues obtained by the state from taxes and levies. Increasing or decreasing public debt is 

directly related to the evolution of budget deficits. If the public expenses are higher than the 

public revenues, there are created prerequisites for the need to make loans in order to cover 

such expenses and thus contributing to the increase of the public debt. 

 

3. An overview of debt in the economies of European countries 

Most of the economies of the European countries are characterized by high public debt and a 

significant fiscal deficit. States with high public debt are facing many problems when 

contracting international loans, as was the case in Greece in 2012, if they do not accept 

repayment plans established by creditors, in order to maintain access to the international market 

and sustainable interest rates with regard the sovereign debt. The credibility of governments 

with regard to the management of public debt depends not only on the reputation of the debtors, 

but also on the financial institutions that would be able to prevent the occurrence of defaults. 

Romania, as a member of the European Union, has pledged itself to respecting the budgetary 

discipline imposed by the Maastricht Treaty, namely not to exceed a budget deficit larger than 

3% of GDP and public debt larger than 60% of GDP. These levels are based on concepts 

defined in the methodology of the European System of National and Regional Accounts (ESA) 

2010 edition. 

Due to the occurrence of the debt crisis in the countries of Europe, the ability to repay and 

rescheduling the debts of certain European economies has become a matter of major concern 

for the European Union (EU), with question marks regarding the economic integration thereof. 

Following the outbreak of the 2007 financial and economic crisis, International Monetary Fund 

(IMF) imposed on developing countries, including Romania, budgetary balancing conditions 



3 

 

or even the requirement to register a surplus, regardless of the stage in which the country is 

within an economic cycle or the development strategy of that country. 

In the first years after the global economic crisis, many countries and financial institutions in 

Europe emphasized the implementation of austerity programs to cut the large budget deficits 

they faced. The effect of these measures on the evolution of public debt in the national 

economies of Europe remains uncertain and difficult to assess. 

Reinhart and Rogoff (2010) have shown that public debt calculated as a share of GDP can have 

a detrimental effect on the real GDP growth rate. Thus, if the public debt to GDP ratio is more 

than 90%, this may slow down economic growth. 

This slowdown occurs because financial resources of future generations shall be used to pay 

interest on current public debts. Moreover, the very existence of a high debt also implies a 

reduction of the margins of manoeuvre with regard the decrease of taxes and levies. It is 

considered that a reduction of taxes and levies will lead to the improvement of the economic 

situation in the long term, but, in the short run, it will result in the deterioration of the public 

debt. 

Subsequently, the study carried out by Reinhart and Rogoff proved to be wrong, which affected 

the economy of the countries which were imposed harsh austerity programs by the IMF. Thus, 

Olivier Blanchard, chief economist of the IMF, pointed out that the Fund misjudged the impact 

of austerity on European economies, considering that the researchers underestimated the 

increase in unemployment and the decrease in domestic demand associated with fiscal 

consolidation (Blanchard, 2013). 

The consequences of the austerity budgets, for which budgetary expenditures were drastically 

reduced, consisted of the reduction in GDP per capita in 2012 compared to 2007 by 26% in 

Greece, 12% in Ireland, and 7% in Spain. Thus, it was found that reducing government 

spending in a stagnant or shrinking economy does not trigger its recovery (H.J Chang, 2014). 

 

4. Sustainability of Romania's public debt 

Romania has recently expressed its intention to join the euro area. However, it is a country 

where the budget deficit and public debt have increased. For 2019, there are forecasts for a 

budget deficit of up to 3% of GDP and a public debt of around 40% of GDP. Recently, the new 

liberal government has expressed its intention to increase this deficit up to 3.5% or even 4.4%. 

Romania has a significant deviation from the medium-term budgetary objective of 1% of GDP 

provided by the EU "Stability Pact". Thus, the EU Council recommends that the Romanian 

authorities take the necessary measures to ensure that the increase rate of net primary 

government expenditure falls within the established limits, but it is noted that no measures have 

been taken in this respect. Thus, the EU Commission draws attention to the risks and 

vulnerabilities the Romanian economy faces, such as the unsustainable increase of the level of 

public debt burden (instalment payments + interest rates) in the coming years, with obvious 

foreseeable negative effects on the standard of living of Romanian people. 

 

Fig. 1 - The evolution of Romania's public debt (1990-2018) 

 
Source: https://datoria.ro/ 

0,9
8,62

20,4521,9517,5421,61
28,7427,3627,7132,6731,1128,5828,7425,8422,4420,3118,2519,6820,94

28,8629,9134,1937,2737,7639,3937,9937,5635,1434,9535,09

0

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60

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.5

Share of public debt of Romania in GDP



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The sustainability of public debt is calculated by the dynamics of government debt in GDP and 

not by the dynamics of the amount in absolute terms. Romania has the fifth lowest share of 

government debt in GDP among EU28 Members States, i.e. 34.2% of GDP, according to the 

latest data published by Eurostat in the second quarter of 2019 - well below the alert threshold 

calculated at 45% of GDP; it has also benefits from a reduced pressure of short-term debt 

service and a diversified investor base. Long-term foreign debt was approximately € 73,831 

million in September 2019, while the short-term external debt was € 34,407 million. According 

to NBR data, in 2019 the degree of short-term external debt coverage with foreign exchange 

reserves was 77% compared to 74.3% at 31.12.2018, which indicates a lower probability of 

facing liquidity crisis. From this point of view, the concerns of the EU Commission do not 

seem to be well founded, but such concerns concern the stagnation of the structural reforms 

and the fiscal-budgetary consolidation, given that year-to-year Romania's economic growth is 

mainly due to stimulating the consumption led growth and not due to production-led growth 

drivers. 

Before the onset of financial and economic crisis of 2007, Romania's public debt has been 

relatively small, around 20% of GDP, but it doubled by 2014. The main cause was the increase 

of the budget deficit, caused by the bankruptcy of many companies, the increase of 

unemployment rate and disintermediation in the banking system overwhelmed by 

accumulation of defaults. 

The factors underpinning the sustainability of the public debt are as follows: the ability of a 

country's economy to generate primary surpluses, the size of interest on state loans, the risk 

premium attached, and its own economic growth rate (Socol, 2013). Thus, for the level of 

public debt in the coming years to be sustainable it is necessary to reduce the primary deficits 

and/or to generate primary surpluses. One possible solution would be that the interest rates on 

loans made by the Romanian state do not exceed the rate of economic growth of our country. 

 

5. Social and environmental limits of economic growth 

In recent decades, both from a macroeconomics and a microeconomics perspective, the level 

of debt has increased. This was not due to the shortages, but to the surplus and excess. The 

society did not suffer from hunger, but faced another dilemma: how to offer a meal to someone 

who ate too much (Sedlacek, 2012). 

The global financial and economic crisis of 2007 shows how much dependence there is on 

economic growth and how difficult it is to accept the decline of GDP, an indicator introduced 

and measured consistently, for the first time in 1790 in the U.S.A. 

The lack of constraints on government decision-makers regarding spending, taxation or 

borrowing leads to a significant increase in public debt, and the new generations of taxpayers 

are facing insurmountable tax burdens. 

Those countries where there is an increase in terms of employed economically active 

population benefit from greater room to manoeuvre in terms of tax cuts, leading to a reduction 

in long-term pressure on public budget. Even if lowering taxes has a short-term beneficial effect 

on the government budgetary situation, if this tax reduction takes place amid a reduction in 

terms of employment of the active population, it can lead to a deterioration of the long-term 

budgetary situation of that country. 

Since public debt is measured as a percentage of GDP, a reduction of debt in order to avoid 

economic turmoil can be achieved by supporting GDP growth through investment and GDP 

expansion policies, rather than by reducing public debt through additional taxation measures. 

The way in which interest rates are set by central banks can influence public debt both in terms 

of current financing conditions and in terms of government expectations. Thus, central banks 

have a key-role in determining the government to pursue public debt stabilization policies. 



5 

 

It should be stressed that the GDP level is not a landmark for quality of life and no landmark 

for economic sustainability. There are extremely important elements, which escape the scope 

of GDP, such as the assessment of health status, education level, housing conditions of the 

people, quality of the environment, which are subjective, but also very important elements in 

human society. GDP is an indicator specific to the present time. It does not take into account 

what remains to future generations, especially in terms of quality of the environment. 

Sustainability is a milestone of ongoing developments. We may state that an economy is 

sustainable if the future generations will have at least the same capital (resources) we have at 

our disposal today. Therefore, it is about the aggregation of several types of capital (resources): 

economic capital (corporate, household and public sector’ assets), human capital (educational 

expenses) and natural capital (environment) (Diemer, 2015). 

Under the aegis of the European Commission, a report was prepared (Stiglitz - Sen - Fitoussi, 

2009) in order to find those tools that are able to quantify, at its true scale, the economic 

performance of a country, and set a set of 12 recommendations were made, of which we 

mention the one that underlines that the assessment of sustainability requires a set of clearly 

defined indicators, which will allow the measurement of the quality of life’s dimension in 

addition to a monetary index. 

The issue of pace and limits of economic growth was discussed and debated upon on several 

occasions, starting with Thomas Malthus, and continuing with the Club of Rome, until now 

when climate change affects large areas of our world. Economic growth has its limits, the 

density of the Earth’s human population has been increasing, and the discovery of new deposits 

of raw materials is declining. Although economic and technical progress supports the economic 

growth, it is very unlikely that energy supply failures or natural resources shortcoming will not 

occur in the future, in order to keep the annual growth rate of gross world product (GWP). In 

order to prevent the depletion of resources used in production, the pace at which they are 

consumed must be reduced (Kolodko, 2014). 

 

6. Conclusions 

The advanced economies should aim at slowing down their economic growth pace and, while 

doing so, they should not be constrained by the social and ecological restrictions, as increasing 

production does not trigger automatically an increased level of social satisfaction. Developing 

countries need to be aware that implementation of their aim to accelerate production growth is 

at the expense of environment safety and generate a rapid depletion of natural resources, 

ultimately leading to a lower quality of life. 

According to Prof. Jorgen Randers - the author of a comprehensive global forecast based on an 

unprecedented calculation of GWP – by multiplying the number of people aged 15 to 65 who 

are able to work worldwide with the output they generated, the output it will grow year by year, 

but the rate of economic growth will decrease by 2050 (Randers, 2012). 

The current state of play together with the future constraints will trigger a change in the 

perception of the economic development of the countries, and the companies shall be evaluated 

not only by their financial statements, but also by the social and environmental impact of their 

operations. The interventionist role of the state and the importance of resource allocation 

related policies by governments shall increase, because the market will not be able to cope by 

itself with the problems that will arise in the process. 

 

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Editura Polirom, 58-60 



6 

 

[3] Chang Ha-Joon (2014), Economia. Ghidul utilizatorilor, Editura Polirom, 152-154 

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