Acta Universitatis Danubius. Œconomica, Vol 14, No 7 (2018)

Abstract

This paper explores the relationship between the budget deficit and public debt, as well as their effects on GDP in Kosovo during the period 2010 to 2018. The choice of period was guided by data availability for Kosovo’s public debt. Up until 2010, Kosovo did not have a legal framework that would allow the general Government to have domestic debt, and the budget had no source of finance other than its own tax and non-tax revenues. In the period up to 2018 the share of public debt and budget deficit in GDP did not exceed the margin of 40 per cent and 2 per cent, respectively, prescribed by the fiscal rule. The aim of the paper is to determine the empirical relationship between Kosovo’s public debt and budget deficit in macroeconomic terms. The paper also estimates the correlation between public debt and budget deficit, as well as its components. The methodology used is based on the econometric analysis of regression over time series (OLS). Using these data, a model is generated to examine the relationship between public debt as a dependent variable of the deficit and interest payments on debt repayment. Our main finding is that when the budget deficit increased by 1 per cent, the public debt increased by 4.96 per cent, and when GDP increased by 1 per cent, the budget deficit grows by 0.25 per cent.