Assessing the Leverage Effect of Public Debt in Albania and Serbia

In this paper, we attempt to measure the leverage effect generated by public indebtedness by showing that it is advisable for a Government to jointly use public funds and public debt when financing public expenditures because of the improvement in public fund profitability produced by such a combination. To this regard, we will first elaborate a theoretical background of public fund profitability derived from private sector investment project analyses, before providing a simple assessment technique of public debt leverage on public funds. It will be evidenced that as far as Albania and Serbia are concerned, the leverage effect of public debt is positive only if interest rates are not too high, if public expenditures are no greater than GDP (gross domestic product) and no smaller than public debt.