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Debt sustainability and the effectiveness of fiscal policy tools - The case of the Maldives

Year: 2025

Type: article

Abstract: This study examines the effects of fiscal policy tools—spending cuts versus tax hikes—on debt sustainability and economic growth in the Maldives. Using a structural vector autoregressive model, we assess short- and long-term impacts on debt. Results indicate that tax revenue management effectively reduces debt, while government spending cuts contribute similarly in the short term and significantly more in the long term. Economic growth, conversely, stabilizes debt in the short term but fuels it over time. Our findings highlight the importance of policy composition in managing debt sustainably, emphasizing the effectiveness of tax revenue over expenditure adjustments for long-term stability.

Source: Economic Analysis and Policy

DOI: 10.1016/j.eap.2025.04.013

Authors: Paresh K. Narayan, Aminath Seema Ismail, Mohamed Imthinan Saudulla, Syed Aun R. Rizvi

Institutions: Monash University, Maldives National University, Lahore University of Management Sciences

Language: English

Topic: Fiscal Policies and Political Economy

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $2,890