Evaluating national debt

Question 1

Why national debt bad?

Answer 1

1) high and rising stock of government debt can lead to higher taxes in the future
2) higher taxes and bond interest rates can ‘crowd out’ the private sector

Question 2

‘crowding out’

Answer 2

• rise in public sector borrowing and debt may ‘crowd out’ investment in the private sector
• financing impact of an increase in government borrowing = bond issues/ higher taxes
• fiscal conservstives argue that borrowing and debt need to be kept low to keep interest rates and taxes low
• frees up scarce resources for the dynamic private sector to invest and grow

Question 3

Defending rising national debt

Answer 3

1) Government borrowing is required to fund investment in critical infrastructure
2) The risks of causing crowding out are limited if bonds remain attractive to overseas investors

Question 4

Is high level of national debt a concern?

Answer 4

• depends on the ability of the government to attract investors to buy new debt
• depends on value judgements how best to fund public services and welfare and which generations should bear the cost of doing this
• rising national debt raises questions of intergenerational equity