This study examines the issue of fiscal sustainability—measured through the response of the budgetary balance to public debt levels—for 36 OECD countries and candidate countries, and it shows that the relationship is non-linear and depends on the level of the informal economy as a threshold variable. Using the Panel Smooth Transition Regression model, the analysis uncovers regime-dependent fiscal behavior, indicating that the effect of public debt on the budget deficit varies significantly under different economic conditions. […]