Sample Essay on Consequences of Public Debt

Sample Essay on Consequences of Public Debt

Public debt occurs when the government expenditure exceeds revenue. This phenomenon usually has negative consequences to the economy and the affected people. History is replete with governments that have suffered varying degrees of public debt. In cases where a country cannot tame its public debt, it may rise to boil points and lead to the tumbling of the economy. While small levels of the public might not be harmful, caution is necessary to avoid economic turmoil. In this essay, we shall discuss the major consequences of public debt to an economy.

The British government has been on the borrowing list for a very long time. This trend seems not to be ending anytime soon. Thus, there is a strong imbalance between what the government is spending, and what it earns in form of taxes. While this is the trend, the policy of untamed public deficit is unsustainable and the sooner the government reverses the pattern, the better for the British economy. Though this may not get worse soon, the trend is unhealthy for the country’s future. In the recent past, UK’s public debt has had far-reaching effects. Top on the list is high-interest rates and spending cuts. According to research, the UK government pays bonds for an average of 15 years. This worsened by the fact interest increase, as the government continues to borrow and spend, raising its public deficit. On the other hand, high-interest rates in a system that has high public debt would mean that the people would have less to pay for service the debt and higher taxes even for the future generations.

Another consequence of public debt is that it stifles business. When the government borrows too much, it increases the demand for credit services in the market and the cost of borrowing hikes because of changes in demand. Higher borrowing cost makes it expensive to finance investments and various capital goods within the private sector. This trend is economically harmful and it sends away investors who create wealth and jobs that are necessary to salvage the economy from the jaws of recession. Worse enough, the government has to dispose its bonds at lower interest rates to attract potential investors. This phenomenon is called crowding out of private capital and implies fewer jobs and less investment.

Public debt further causes currency collapse. Most UK’s clients are pension funds and Central Banks in foreign countries, which only invest in safe bonds. However, many rating agencies still believe that Britain is still good and safe for investments. For this reason, it retains the AAA status. If the UK government loses the seal of these agencies and the merits that come with it, the economy will suffer devastating effects that may lead to its tumbling. Weakening of the market is economically unhealthy as it may result in inflation, forcing the government to print money and buy its own bonds. Some schools of thought see the government’s Quantitative Easing Program as a sign of failure of the economy. This may discourage investors, forcing them to sell off their assets, and sending the interest rates up in the skies. There is no doubt that if the UK does not tame its expenditure, the sterling will lose its value and allow inflation to takeover.

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