national debt application Flashcards
another differenc between cyclical and structural bd
structural: occurs at full employment
cyclical: occurs in recession
Pros of national debt
- higher growth, lower unemployment
- benefits of increased spending (increased ed, healthcare, infrastructure and public services quality and quantity)
+ incease prod potential, LRAS icnreases s competitivness and LR growth boosted, LR tax returns increases, living sr - redistribution of income
- incentive of tax cuts
- crowding in
Cons of a rising budget deficit
- deterioration of gov finances
- inflation conflict
- Current account conflict
- crowding out effect (debt fulled gov spedning), harming SR and LR growth, unbalanced growth whcih is very relaint on public sector
- x -inefficiency
evaluate pros and cons (which is more dominant?)
- state of gov finances; if aloready in BD, and high ND, cons will outweigh pros but if surstinable , a budget surplus is being run maybe and pros can outweigh cons
- SR vs LR impacts: LR returns come from tax cuts or gov spedning so pros dominate depending on nature of spending
- stage of economic cycle: in a recession a bd is desirable in increasing AD, clsoing negative output gap and returning an economy to full employment according to keynesians but classical economists disagree. During a boom, a bd will lead to overheating and inflation
- specific policy used: cuts in taxs rely on business and consumer confidence and limit effectivness of policy
- ## automatic stabilisers can NATURALLY support output and growth in recession, thus if the role of these are strong it reduces need for discretionary fiscal policy
Japan’s national debt to gdp
220% but japan has made debt servicing sustainable
- BoJ removed slef imposed ceiling on japanese gov bonds to support the price of JGBS and keep bonds low (the 10-year bond yield for Japan in April 2022 was just 0.25%). Low borrowing costs help to make a high national debt more sustainable
- the size of the Japanese working population declining, over the long-term, the burden of paying back the debt through interest payments for debt-financed government spending will be borne by future generations of taxpayers.
- has world’s second highest proportion of people aged 65+
Who has low debt to gdp
Estonia - 18%
- However, this doubled during the pandemic. Having low government debt gives them plenty of scope to use an expansionary fiscal policy when their economy suffers an external shock.
But perhaps public sector (government) debt can also be too low? Estonia has become a successful member of the European Union but faces numerous economic and social challenges including an ageing population, high income inequality and low energy efficiency.
UK national debt as of 2022/23
£2.54 tn
uk debt to gdp
98.3%
Current state of uk debt
- In Jan 2023, UK public sector net debt was £2,567.2 billion or 100.1% of GDP
- This is the highest level of public sector debt since 1961.
- The OBR have forecast substantial rises in UK debt over the coming decade because of demographic factors, putting strain on UK spending.
Why do OBR believe national debt can rise to 350% of GDP within 50 years
- An ageing population and demographic changes will put increased pressure on government spending, notably health care and pension spending.
- A smaller working population will limit UK’s productive capacity.
- stress on finances from geopolitical events, such as frostier relations with China, Russia and the Middle East.0
- Higher energy prices
- Costs of climate change.
- Declining tax revenues from petrol in a decarbonising economy.
- Low productivity growth of UK since the financial crash of 2009
- Recent boost to debt from the financial crisis and one-off cost of Coronovirus pandemic, which cut tax revenues and required government support for lockdown measures.
BIT HARD TO PREDICT HOW THESE FACTORS WILL CHANGE AND UNFORESEEABLE SHOCKS CAN OCCUR
What is a recent issue with uk national debt
interest payment
- UK 30-year bond yields – which dictate the country’s long-term cost of borrowing – rose to the highest level since 1998 in oct 2023 surpassing the levels seen a year ago in the panic after Liz Truss’s mini-budget. US Treasury yields have climbed to a 16-year high, while EU nations and Japanese government borrowing costs have also risen sharply.
- Companies with high debt levels could come under greater strain, while there could be pressure in the financial system. Earlier this year, rising bond yields led to problems for medium-sized US banks, including the failure of Silicon Valley Bank.Bc they invested in a bunch of bonds just before yeilds rose meaning when yileds rose their bonds went down so they portfolio dropped. Lakc of diversification meant they have invested so mcuh into it so people pulled money out of svb
Describe the greek bailout crisis
- following 2008 gfc meant many european countires had huge gov debts but greece has a spiralling fiscal deficit, borrowing more than they would earn in taxes
- in 2020 country revelaed sky high deficit and frozen out of bond markets
What happened when greece announced the debt
- requested bailout from IMF and EU which began in 2010
- they received three successive packages totalling £259 bn at the price of drastic austerity measures
effect of austerity measures in greece
- People suffered spending cuts, high taxes and repeatedly slashed salaries and pensions.
- More than 400,000 people emigrated and in 2013 the unemployment rate peaked at 27.5% - but for those under 25 it was 58%.
- At the height of the crisis, some worried that the eurozone - the 19 countries that shared the euro - would collapse alongside Greece. euro fell to lowest level against the dollar since 2006
After effects of the bailout crisis that last today
- The economy is 25% smaller than when the crisis began and it will take decades to pay off its debt pile of 180% of GDP.
- after 8 years, only then could it borrow on intl markets at market rates
