Sample Essay on Impact of Public Debt on Economic Growth
Public debt occurs when a government is spending more than its revenues. This is a common trend in most countries even though the ultimate impact varies from country to country. Additionally, the policy that a country takes to tame a public deficit may not apply to another economy because of different causes of the situation. However, the bottom-line is that public debt affects economic growth in a wide range of ways, some of which this essay discusses.
According to research, high public debt negatively affects the economy as slow growth is usually recorded during such periods. In most cases, experts use a correlation approach to justify austerity approaches in taming a bloated national debt. While this is the case, the correlation between public debt and economic debt remains controversial. For example, a common question that policymakers grapple with is deciding whether a slow economic growth rate leads to debt or vice versa.
The main impact of public debt is the cost of servicing the debt. This is because the burden to repay the deficit is usually passed to the public through increased interest rates and taxes before the situation normalizes. High interest rates have far-reaching effects to the economy as they contribute to poor living standards. For example, they discourage investors and limit the purchasing power of the public because of inflation. Both working and the unemployed become dependants because the value of money in the market is too low to meet their needs. Worse, enough is the fact that public debt may have hurting effects to the future generation than the present especially if there are no measures in place to tame the deficit early enough. Excessive debt means that the government is borrowing into its future economic life and that coming generations will spend most of their time servicing the deficit and not enjoying life.
Public debt also affects the business world. As mentioned before, high interests are passed by the public and the private sector. For instance, businesses have to remit more money to the government during a deficit period, making them share its obligation of repaying borrowed loans. This becomes a challenge for small companies and business enterprises, which cannot afford regular remittances. Businesses also find it hard to borrow because of harsh borrowing terms and conditions. Oftentimes, lenders offer loans with higher interests and charge high fees for delayed servicing. In some cases, they may call the loan due earlier than expected, making it difficult to repay.
Excess public debt may undermine the economic growth of a nation because of massive inflation, referred to as hyperinflation. At this level, the government is forced to print money, which does not have value. Such levels of deficits are dangerous because they come with other challenges like unemployment, high cost of living and poverty. People lose their jobs during inflation because employers including the government and the private sector do not have enough money to pay salaries and maintain the employees. They therefore resort to laying off workers in a bid to cut down the wage bill, rendering the victims jobs and jeopardizing their efforts to lead a decent life. Because of high interest, high prices, and low purchasing power owing to the joblessness of people, majority end up in poverty, as they cannot afford basic needs, thus hindering economic growth.
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