Fiscal Space in the Western Balkan Countries – Opportunity for Growth?

Abstract

There are different definitions of the term “fiscal space,” and the final and comprehensive definition is still in development. Different definitions relate to the fiscal space as budgetary space for funding economic purposes, the difference between the current level of debt and the country-specific debt limit, or the financial capacity of a country. No matter the definition, it is evident that fiscal space relates to the gap or space that countries have for funding their needs, either from domestic or foreign resources. Global financial crisis, debt crisis, COVID-19 pandemic, and the most recent energy crisis and inflation showed the importance of available fiscal space in those circumstances, as well as for the growth and development path in general. The purpose of this paperwork was to research the fiscal space of the Western Balkan countries and its possible impact and relation with economic growth. After analyzing budgetary spaces and spaces for fur¬ther public debt during a specific period of time (2007-2023), the paperwork also investigated the impact of the fiscal space, measured as budgetary space and debt gap, on economic growth in the mentioned countries for the same period. Fiscal space analysis and its relationship with economic growth were investigated using dynamic panel models that were estimated using Kiviet's LSDVc estimator for dynamic panel models. Results showed that fiscal space positively impacts economic growth, either measured as budgetary space or debt space, according to country-specific debt limits. That indicates that debt limits are important in debt management policies, and better fiscal balance and lower public indebtedness contribute to higher economic growth.