3.3d the government (national) debt

Question 1

government debt

Answer 1

refers to what a government owes.

Question 2

bond

Answer 2

a bond as a promissory note: it promises to pay the holder of this note a specific payment at a specific future date.

Question 3

budget surplus

Answer 3

government collects mroe than it spends

Question 4

budget deficit

Answer 4

when government spends more than they collect in taxes

Question 5

why is national debt expressed as a percentage of GDP

Answer 5

1. scaling: it put the debt in context relative to the size of the economy.
2. debt burden: the ratio refelcts the difficulty of paying off the debt. a high ratio indicates a potentially harder time serving the debt(higher chance of defaulting), which could lead to higher interest rates and economic instability.

therefore, represengint debt as a percentage of gdp provides a clearer picture of a country’s financial health and its ability to manage its debt obligations.

Question 6

costs of debt servicing

Answer 6

1. increased debt servicing costs: govt spends a significant portion of their budget on interest payments = resources diverted from essential areas like infrastructure, education, and healthcare, potentially impacting poorer households the most
2. limited fiscal policy flexibility: if recession hits, high debt may restrict the govt’s ability to borrow more for stimulus spending. lenders might demand higher interest rates due to increased risk, further hindering borrowing
3. risk of inflation: to service domestic debt, governments might resort to “monetising” it, printing new money. this can lead to inflation and currency depreciation, increasing the cost of repaying foreign debt and potentially causing further inflation
overall, a high nat. debt can lead to reduced govt spending on vital areas, limited ability to respond to economic crises, and the risk of inflation and currency instability.

Question 7

3 overarching costs of high national debt

Answer 7

1. cost of debt servicing
2. credit ratings
3. impact on future taxation and govt spending.

Question 8

cost of national debt: credit ratings

Answer 8

1. credit ratings: agencies like moody’s and s%p assess the creditworthiness of borrowers like governments by assigning ratings. higher ratings reflect lower risks and attract lower interest rates.
2. debt to GDP ratio and ratings: Increasing national debt relative to GDP raises the risk of downgrades, reducing investor confidence and leading to higher interest rates.
3. risk premiums and debt trap: governments facing downgrades and higher interest rates need to borrow more to service existing debt, creating a vicious cycle (“debt trap”) where increasing debt leads to even higher borrowing costs and risk of default
in summary, high national debt can lead to downgrades, higher interest rates, and even a debt trap where the government struggles to borrow its way out of trouble.

Question 9

cost of high nat. debt: impact oil future taxation and government spending

Answer 9

1. high debt forces choices: governments need to reduce deficits, leading to cuts in spending or increases in taxes, or both.
2. primary budget surplus: aiming for a “primary budget surplus” (revenue>expenses) becomes crucial to gradually reduce debt
3. austerity policies: cutting spending often involves reductions in welfare benefits, pensions, public sector wages, and infrastructure investments.
6. potential economic drawbacks: austerity can lead to decreased economic activity and income, initially increasing teh debt-to-gdp ratio despite absolute debt reduction.
4. tax increases: raising taxes, esp indirect, disproportionately affects lower income groups. - increased income in-e.
5. hard choices, hard impacts: these policies, necessary for unsustainable debt, but bring hardships to many, especially the poor.

in essence, high national debt presents the government with difficult choices, often requiring austerity measures that come with significant trade-offs and hardships for citizens.

Question 10

determinants/indicators of when debt becomes dangerous

Answer 10

1. interest rate vs growth: healthy gap=manageable
2. primary budget balance: consistent improvement in “primary budget” (revenue>non-debt expenses) signals a government’s commitment to controlling debt.
3. debt usage: spending debt on productive investments for future growth is favourable compared to using it for current expenses.
4. tax cuts and debt: debt accumulation due to tax cuts carries increased risk as the evd. fro their effectiveness in boosting investment is weak.
5. currency and debt holders: domestic currency, like in japan is less risky than relying on foreign borrowing
   in conclusion, while there’s no magic debt-to-GDP threshold, these indicators paint a picture of a country’s ability to manage and grow w its debt burden. finding teh right balance is crucial fro avoiding financial pitfalls and ensuring long-term economic stability.

Question 11

benefits and risks of debt

Answer 11

benefits:
1. recession recovery: debt-financed spending can help overcome recessions and promote growth
2. disaster response: debt allows for swift resource mobilisation in emergencies like natural disasters
risks of high debt:
1. debt crisis: uncontrolled debt can lead to financial meltdowns, requiring painful economic adjustments and hindering future growth
2. growth obstacles: high debt-servicing costs can divert resources from productive investments, potentially slowing down economic progress