Principles of Macroeconomics: The Importance of National Debt
Introduction
National debt is a popular term that is heard on the news or read in the papers and is utilized by economists, politicians, opinion-providers and academicians to refer to an economic concept whose importance transcends social status and location. National debt is defined by CNBC as the summation of all the debt owed by a country’s government . National debt is composed of the amount borrowed or the principal plus all the interest payments levied on the principal amount. National debt is important because it funds government programs in cases wherein the government has not collected enough revenue from the collection of taxes. Understanding national debt is important because governments often fuel their programs, which are critical for national progress, on using debt financing. A related term, deficit spending, is also popular since most governments have to find financing for the deficit in their annual national budgets, for spending on government allocations and programs .
Cost and Benefits of National Debt
The most important benefit of using debt is the increase in the amount of disposal income the government can use for funding current programs . The use of public debt is acceptable because it is a way of expanding the productive capability of the country with the view that the increase in productivity (which translates to an increase in the Gross Domestic Product or GDP of the country) will be more than the cost of borrowing the funds. Using this simple logic, it is thus possible to actually calculate if a government’s resolution of utilizing debt financing to fund its development programs makes overall-financial and economic sense if the cost of borrowing are justifiable.
Public debt is created through public borrowing . The popular ways of borrowing money from the public is through the sale of government securities. Usually, governments use bonds as the instrument to get financing from the public. Bonds have a fixed term and interest which makes it predictable and relatively safe for the lending public, and manageable for government units since the debt is repaid over a fixed number of years. There is no clear and definitive linkage between the use of national debt and effective fiscal policy. However, governments often utilize debt financing to increase productivity and are therefore more an economic tool rather than a fiscal tool.
The disadvantages of using public debt are far more numerous, with most experts saying that the use of public debt to justify economic progress is a complete fallacy. According to Furth (2013), economic experts have shown that if government use high levels of debt to financial economic programs, the results lead to a negation of economic growth. The chain reaction that creates a negative economic effect is that when public debt is used, the overall private investment participation is reduced which creates an encompassing reduction in wages earned which ultimately results in decreased growth . According to Furth, the economic analyses of advanced economies indicate that a strong correlation exists between high levels of public financing use and GDP growth rate, with countries that use high levels of debt having slow GDP growth. This is especially important to the United States, whose debt levels are at 84 percent of the country’s entire GDP.
Conclusion
The materials examined to evaluate national debt will highlight the dangers of using public debt to finance economic programs, but it will be rare to find an academic study that would suggest abandoning the use of national debt. This is due to the fact that public debt provides the government with a current capability for spending for future generations without having to wait for future generations to contribute to today’s needs. In short, it is easy to rationalize the use of public financing because in a way, it is a form of savings for the future. Governments will always want to prepare for what would happen next, and without the use of public debt governments will be more challenged to address growth and development.
Bibliography
Koya, M. (2011, June 29). CNBC Explains: What is National Debt? Retrieved from CNBC: http://www.cnbc.com/id/43381362
US Government Spendings. (n.d.). Federal Deficit. Retrieved December 18, 2014, from US Governments Spending: http://www.usgovernmentspending.com/federal_deficit_chart.html
Nautet, M., & Meensel, L. V. (2011). Economic Impact of the Public Debt. Retrieved December 18, 2014, from NBB: http://www.nbb.be/doc/ts/publications/EconomicReview/2011/ecorevII2011_H1.pdf
International Encyclopedia of the Social Sciences. (1968). Public Debt. Retrieved December 18, 2014, from Encyclopedia.Com: http://www.encyclopedia.com/topic/public_debt.aspx
Furth, S. (2013, February). High Debt Is a Real Drag. Retrieved December 18, 2014, from The Heritage Foundation: http://www.heritage.org/research/reports/2013/02/how-a-high-national-debt-impacts-the-economy
