Threshold Role of Democracy in the Nexus of Sustainable Development and Fiscal Stance

This study investigates how democratic quality conditions the fiscal implications of sustainable development policies in OECD countries. Building on the theoretical notion of a democracy threshold, the analysis explores whether fiscal stance – measured through budget balances and debt dynamics – responds differently to sustainability-oriented expenditures across varying levels of democratic maturity. Annual data for 38 OECD economies spanning 1993-2023 are employed, and a dynamic panel threshold model following Caner and Hansen (2004) and Kremer et al. (2013) is estimated to capture potential nonlinearities and endogeneity. The model integrates fiscal, macroeconomic, and institutional variables, with the democracy index serving as the threshold variable. The results reveal the presence of a statistically significant democracy threshold, indicating that below this point, sustainable development amplifies fiscal pressures, leading to higher deficits and debt accumulation. Above the threshold, however, democratic consolidation strengthens fiscal discipline and allows sustainability to be absorbed without destabilizing public finances. These findings underscore that fiscal stance and democratic governance are mutually reinforcing components of sustainable development rather than competing objectives. Policy implications highlight the importance of tailoring fiscal frameworks to institutional maturity – strengthening fiscal transparency and accountability in low-democracy regimes while integrating sustainability assessments into fiscal rules and budgeting in advanced democracies. The study contributes to the literature by introducing the democracy threshold concept into fiscal stance analysis and providing empirical evidence of regime-dependent effects of sustainable development. By linking fiscal stance, democracy, and sustainability performance within a unified empirical framework, this research aligns with SDG 8 (Decent Work and Economic Growth), SDG 12 (Responsible Consumption and Production), SDG 13 (Climate Action), and SDG 16 (Peace, Justice, and Strong Institutions), offering guidance for designing more resilient and equitable fiscal strategies in OECD countries.