National debts are caused by budget deficits that are as a result of spending more than what is received from taxes. This results in harsh economic times for countries as they strive to adjust to the national debts that occur during the period. Several theories have been put in place to argue and relate to the issue concerning national debt. Keynesian economists bring forth arguments that strive to balance the budgets and appropriate times to increase the deficit. Economist John Keynes was against the idea that the state was in need of a balanced budget (Tobin 1975). His argument was based on the premise that appropriate fiscal policies were necessary for dealing with budgets during times of economic constraints (Tobin 1975). In his belief, economic policies need to be related in the short run since long-term goals may be detrimental to the economy. The Keynesian theory was inclined to the facts that government budget should be shifted towards a deficit during times of national debt and recession.
National debts are also affected by the political will and leaders that influence policy decisions. There needs to trust that public leaders can effectively pass and use decisions that will meet public needs and avert any policies that may change the level of pessimism in the GDP to debt ratio. Politicians legislate on policies that affect issues of taxation, debt management, and remittances among other problems, therefore, are instrumental in the control of national debts. In instances of an increase in government spending, where debt finances are optimal as minor increments on all possible tax rates that may be used in the financing of interest payments that may include minimal burdens than increases made in huge increments of single tax rates that may affect national debts increase.
High national debt has long-term effects on the economy as there is the tendency for subsequent low growth. Annual data indicate that inflation roughly averages 3.5% for countries that have an average debt while countries with debt over 90% average 2.3% growth. Economies that have a high debt prevalence roughly average 1.3% growth (Barrio 2015). The adverse effects of debt grow steadily as the level of debt rises from one economic point to the other. The effects of the national debt is that there are a subsequent decrease in the levels of labor productivity as a result of reduced investments, thus causing the rates paid to each worker to be considerably lower. Productive capital, usually determines wages. The long run effect can be attributed a series of steps that lead to decreased capital investments. The production employs both labor and capital, therefore as capital deepens, there is scarcer labor and more productive. Factors of production that become more limited may lead to higher wages. Therefore, when government expenditure out crowds, private investments, there is less capital invested in the economy for capital per worker. The long term effects that are brought about by debt when calculating costs and benefits of government spending is crucial. A national debt that is high can severely affect economic growth. There is a little stimulus for economic growth. Slow economic growth is much worse than recessions as it goes on for a critical moment of time as its long-term consequences is the lowering of incomes. Long-term debt if not managed properly may have adverse effects on the economy for an extended period due to reduced investments.
Long-term effects of budget deficits may resort to ways in which the government may employ the use of fiscal and policy measures that are intended for reducing the level of the budget deficit. Tax increases are one of the steps that can be utilized to reduce government deficits. Tax increments may be used especially in individuals of a particular tax bracket. This form of taxation policy has several effects. The effects of such tax policies include the likelihood of reduced income, spending as a result of the increased tax (Barro 2015). Consumers reduce expenditure due to the fall in purchasing power. However, during instances of high growth rates, tax increments may not result in increased spending. Incentives to work may be too high as a cause of excessive tax rates that may deprive a nation of the relevant workforce.
Government spending may also be reduced as a result of the fiscal deficit. Spending may be cut over a wide array of areas that may include transfer payments (Roubini 1989). Spending cuts enables the economy to grow proportionately as there is more room for low-interest rates to boost spending on growth items. Productivity may also increase considerably when spending measures are cut. This translates to the reduction of unique benefits attributable to the citizens. However, there may be other effects that may arise as a cause of government spending, and this may include welfare benefit cuts that may cause relative poverty and inequality. Subsequently cutting spending in areas like education may have a negative impact that may affect the long-term labor capital (Roubini 1989). The benefits may be viewed as necessary due to their continual use, however after such changes there arises the need to work harder for citizens to be able to pay for the benefits that are quite relevant to their work.
In conclusion, high debt has adverse effects on both the long run and short run for the economy. The management of debt should employ the use of stringent policies that can stabilize the economy and improve the general outlook of the economy while managing debt. Debt may affect the investment prospects of a country, and therefore, mitigation practices should be consistently checked.
References.
Tobin, J. (1975). Keynesian models of recession and depression. The American Economic Review, 65(2), 195-202.
Barro, R. J. (2015). On the determination of the public debt. The Journal of Political Economy, 940-971.
Roubini, N., & Sachs, J. D. (1989). Government spending and budget deficits in the industrial economies.
