Impact of Public Debt on the Relationship between Public Education Expenditure and Income Inequality: Evidence from Developing Countries*

Abstract

This study investigates the impact of public education expenditure on income inequality, focusing on the moderating role of public debt. Using a dataset of 74 developing countries spanning 1974–2022, the analysis applies the System Generalised Method of Moments (GMM) and the Dynamic Panel Threshold Regression Model (DPTRM). While previous research has predominantly examined the linear relationship between education expenditure and income inequality, this study further explores their nonlinear dynamics in the presence of public debt. The System GMM findings confirm that an increase in public education expenditure reduces income inequality, consistent with existing literature and the inverted U-shaped hypothesis. Furthermore, the study finds evidence of a nonlinear relationship between public education expenditure and income inequality; more specifically, a significant threshold effect of public debt is identified. Below the threshold level of the public debt-to-GDP ratio, increased education expenditure effectively reduces income inequality. Conversely, above the threshold, the impact of education expenditure on inequality becomes positive and loses statistical significance. The study offers a novel perspective for policymakers, emphasising that the effectiveness of education policy interventions, particularly education spending, is contingent on macroeconomic conditions such as debt sustainability.