Modelling of the Effect of the Public Sector Borrowing on the Lithuanian Economy

Abstract

During the last two decades many countries of the world faced rather strong tendency of the public debt increase. In many European countries, including the USA, very similar circumstances occurred, when the government debt increased during the last decade. In the past such high growth of debt level was characteristic only to wars or economic depressions. The level of a certain country’s public debt is mostly determined by the general economic situation of the country and its perspectives. On the other hand, one of the recent and most important issue, faced by many countries, is the effect of the government debt on the economic and social life.Trying to achieve more effective and faster economic development, the government usually borrows in domestic and foreign markets. The academic society discusses the role of the public debt in economics: how the borrowed funds should be used; how much can a government borrow? It is important to determine the place and role of the public debt in the Lithuanian economy and evaluate how borrowing effects the growth of the economy.Currently, the financial markets are closely observing the state budget deficit because it shows how much of financing the government needs at a certain time and how much the rate of the national debt has increased. The analysis of the budget deficit provides information on how effective is the mobilization of the domestic means and on how the state expenses are being managed. All that enables us to decide about state’s borrowing demands. They also point out that the main causes of the budget deficit may be tax collection from income, too high expenses or ineffective control.The governmental borrowing does not cause damage to the economy if only the opportunities provided by debt are used in an optimal way. The aim of this article is to determine a possibility to forecast the limits of the national debt acceptability, knowing the forecasted actual GDP growth and the value of the budget deficit. It is important to learn what level of the fiscal deficit is acceptable to the state and how it could be managed under certain economic conditions. In making a choice for the criteria needed to determine the acceptable level of the budget deficit, it is indispensable to make a notice of the possibility to apply those criteria, e.g. in analyzing and forecasting.