Determinants of subcentral public debt: Evidence from cantons in the Federation of Bosnia and Herzegovina

Abstract

With the growing interest in intergovernmental fiscal relations and theory of fiscal federalism, the academic study of subcentral public debt has gained prominence, particularly in developed countries. However, this focus has been less prevalent in post-transition economies. This article examines the determinants of subcentral public debt in a post-transition country with a complex constitutional structure. The method of generalized method of moments (GMM, specifically SGMM) over fiscally stable 2011–2019 period in the investigation of cantonal public debt in Federation of Bosnia and Herzegovina (FBiH) has been conducted. The study investigates fiscal, institutional, economic, and socio-demographic factors influencing subcentral public debt levels. The findings indicate that variables from each category significantly impact cantonal public debt in both the short and long term. As expected, lagged debt and deficits contribute to higher debt levels, while a greater share of tax revenue relative to total revenue reduces cantonal public debt accumulation. Unique to FBiH, institutional factors - such as special expenditure needs in certain cantons and fiscal factors - such as transfers from the FBiH level also contribute to higher cantonal public debt. These findings highlight the importance of evidence-based policymaking in managing subcentral public debt within FBiH. Furthermore, the study offers valuable insights for other Eastern European and fiscally decentralized countries worldwide. The results underscore the critical role of intergovernmental fiscal relations in shaping subcentral public debt, reinforcing their theoretical and empirical contributions to the second-generation fiscal federalism. The findings suggest that granting greater borrowing authority to subcentral governments is feasible only if intergovernmental fiscal relations evolve to reduce reliance on transfer payments and enhance tax autonomy.