Does fiscal tightening (loosening) reduce public debt?

Abstract This study examined the effect of fiscal tightening and loosening on the public debt of sub‐Saharan African (SSA) countries. To achieve this, the study employed a two‐step approach. In the first step, the effect of government primary balance on public debt was examined; while in the second step, the primary balance was disaggregated into its surplus and deficit components with the effect of each component on public debt examined. By utilising data covering a panel of 37 SSA countries for the period 2008 to 2017, the study employed the Panel System Generalised Method of Moments (GMM) model for analysis. Estimation results indicated that fiscal tightening (via government surpluses) produces a depressing effect on the stock of public debt while fiscal loosening increases the stock of public debt. Economic growth was also found to be effective in reducing public debt. The study cautions against protracted fiscal tightening due to its potential negative effect on economic growth and social welfare, thereby rendering it counterproductive.