An Asymmetric Analysis of Public Debt and Defence Expenditure in Fiji

Abstract

The extent to which public debt has been driven by defence expenditure continues to be intensely debated in the academic and policy spheres. Most literature on the public debt-defence expenditure nexus has used aggregate public debt and assumed a linear relationship. This paper investigates this relationship by disaggregating public debt into external and domestic debt and considers both linear and nonlinear relationships in Fiji for the period 1992–2021. We apply the linear and nonlinear bounds testing procedures within the Autoregressive Distributed Lag model. The empirical findings reveal a significant long-run nonlinear cointegration association between military expenditure and public debt. While a rise in military expenditure can increase both external debt and domestic debt, a decline in military expenditure has a greater influence on public debt. Moreover, the asymmetric outcome of military expenditure is more pronounced on the country’s domestic debt compared to external debt. From a policy perspective, strategic reforms in spending can be useful in fiscal management even though military expenditure partially adds to public debt and is not the only factor. Further, the used asymmetric analysis can be valuable in bringing objectivity to other public expenditure programmes.