National Debt

Oct 29, 2021 | 0 comments

Oct 29, 2021 | Writing Guide | 0 comments

National debt can be described as the intra-governmental and public debts that the federal government owes particular creditors. There is an addition of the debt by the federal government when every time it receives less money from the taxes as compared to the amount it spends. The budget deficit per annum is then added to the current debt and the surplus of every budget is subtracted. In cases where the government makes its spending go high in order to restore the economy, there is always an increase in the budget deficit. As the budget deficit increases with time, the burden of the national debt also goes high. It is however not very effective for the government to raise taxes for it to increase revenue because, when the taxes go high, there is always a reduction of people’s disposable income and therefore it causes the demand for goods to go down (Philip, 2010).
There are various theoretical views both positive and negative when it comes to national debt. These may include; it has been said that, a government that is not able to commit to choices of the future policies undergoes a trade off that gives an explanation of the available debt levels. On the contrary, there is a motive to expand the debt and slow up taxation in order to reduce the current problems that are available. When the current prices are inflated, the country’s real value of nominal debt is also lowered and therefore they try to bring it down. The long run debt depends on how well these two incentives that are opposing relate. Another argument states that, there are no problems that come as result of national debt. It only occurs that, too much borrowing restricts the taxpayer from enjoying a high income that is disposable at the moment rather than the future. A reduction in national debt would implicate higher taxation now instead of later and therefore, national debt can be seen as a way of spreading the outputs of a nation among various generations.
In the past, National Debt has been so high as compared to the current world. A very good example is in the Second World War where the United States and the United Kingdom’s national debt hit 150% of their GDP (Holtfrerich, 2013). With this we can see that countries can borrow funds during national crisis times and try pay the debt back as time goes by. This leads to the conclusion that, national debt can be described as a way of dealing with shocks that affect the economy. The consistent economic growth on the other hand makes paying national debts easier. In cases where the GDP grows more rapidly than national debt, it means a very minimal percentage is needed to pay back the interests.
There are many long run costs that are as a result of national debts more so if the debt rates are high and instead of decreasing, it is increasing. The underlying prices are majorly associated with the macroeconomic effects it has. The first long run effect I am going to talk about is the withdrawal of money from areas of investments and private sectors more so in capitals that are very productive. The effects of this is felt when part of the savings made by citizens that helps in purchasing securities of the government becomes unavailable to capitalize different private investments. It also causes a reduction in the stock of capital and reduces the output therefore causing very low income. The second long run cost is it rises the spending of the government when repaying the interests. This will then require an increase in taxes by the government and force them to reduce the expenses it makes on the public services and the benefits that come with it. This will bring a lot of burden to the people and also cause effects to the aggregate demand.
There are different prices the government pays when getting rid of budget deficit when it increases personal taxes or via spending cut reducing payments of transfer for example; Social Security, Medicaid, Medicare and through spending discretionary for example education and defense budgets. An aim to get rid of budget deficit via having increments on personal taxes would definitely cause economic deflation. This will eventually lead to low growth in the economy and increase unemployment rates. If by any chance the government makes a decision of reducing the cut of spending by reducing the transfer payments of its employers, the economy’s aggregate demand would also reduce drastically. Majority of the people will not be in a position to access services like Social Security and Medicare which are considered very basic. If it cuts its spending on things like social security, there would be a very low impact on the economy’s productivity. However, it would cause low economic growth and reduced inflation. Education and defense are considered as basic investments of the government and eliminating spending on such things would give very negative effects when it comes to the growth of the economy as a result of minimal productivity (Philip, 2010). They need motivation to do what they do to their very best and without that, they feel they are not well appreciated.
In conclusion, as much as national debt is affecting most counties if not all, it helps in scenarios when it is needed the most. A very good example is during economic shocks and recessions a country can borrow to help them in that hard time. Getting rid of benefits from the budgets do not help reduce the national debts but it increases it deeply. For example, if by any chance the government makes a decision of reducing the cut of spending by reducing the transfer payments of its employers, the economy’s aggregate demand would also reduce drastically.
Holtfrerich C., (2013). *Government debt in economic thought of the long 19th century*. School of business and economics discussion paper no. 4. Freie University Berlin
International Monetary Fund (2012*). Coping with high debt and sluggish growth* . washington D.C International Monetary Fund.
Philip G., (2010). *Government debt*. National Bereau of Economic Research. Cambridge