The Central Bank of Latvia has published a working paper on how fiscal shocks affect public debt and other fiscal and macroeconomic variables across European Union member states from 2001 to 2024. It finds that primary balance shocks reduce government debt as a share of GDP, but the effect is gradual and initially modest. The paper also finds marked differences between revenue and spending measures, with primary expenditure shocks producing faster, larger and statistically significant reductions in debt, while revenue shocks have gradual and statistically insignificant effects. The analysis uses annual data for all European Union members, identifies fiscal shocks through orthogonalised forecast errors based on European Commission forecasts, and estimates impulse responses with local projections. According to the paper, the different effects on the public debt stock reflect different fiscal reactions following revenue shocks and spending shocks.
Central Bank of Latvia2026-05-15
Central Bank of Latvia working paper finds primary expenditure shocks reduce public debt faster than revenue shocks in EU data
The Central Bank of Latvia has published a working paper analysing how fiscal shocks affect public debt and other fiscal and macroeconomic variables across European Union member states from 2001 to 2024. It finds that primary balance shocks reduce government debt-to-GDP gradually, with primary expenditure shocks driving faster, larger and statistically significant debt reductions, while revenue shocks have gradual and statistically insignificant effects, reflecting differing reactions to each type of shock.