Sample Essay on Effects of Public Debt on Consumption
Public debts have far-reaching effects on the economy of a nation, especially in cases where the deficit is not tamed. Excess public debt may lead to the tumbling of a country’s economy, since it breeds other harsh consequences. Apart from inflation, high interest rates and poor living standards, a high public debt further affects consumption. In this essay, we discuss the impact of public deficit on consumption.
In discussing the effects of public debt on consumption, it is important to underscore the fact that consumption is intertwined with other factors like inflation, demand, purchasing power, and interest rates among other facts. This means that when any of these elements is affected by the government’s excessive spending, the impact trickle down to consumption. In some cases, inflation may increase the chances of an economy to experience inflation. If the debt becomes too strong and the government exhausts its options in dealing with the crisis, it may resort to inflation. This happens if the debt in monetized. In this case, the government may issue debts, which are mandatorily purchased by the Central Bank. It is the money that the government receives from these sales that it uses to service the deficit. The effect of this is a higher supply of money, which may breed inflationary pressure leading to hyperinflation.
History is replete with cases of inflation, which largely emanated from budget crisis. Some of these financial crises may arise because of war, which affects business activities in the market. It may also stem from bad monetary policies adopted by the government. When inflation reaches high limits, the impact gets to everyone in the country. Importantly, consumption becomes a problem as people cannot afford their basic needs and other commodities in the market. Oftentimes, inflation leads to lose of value of a country’s currency. This means that people will have the money, which does not have the value to purchase and consume.
It is essential to note that most households plan for their consumption ahead of time, for proper investment strategies. During hard economic times, most households borrow to sustain consumption and when the economy recovers, the repay debts and invest through savings for future. When the public debt is too high and the government increases interest rates, it becomes impossible for households to borrow money to support their livelihoods and business. Additionally, for those that risk borrowing, repaying becomes a problem because of the unfavorable rates. This in turn discourages consumption and affects then living standards of people.
In terms of exports and imports, public debt discourages foreigners to invest in an economy as well as paralyzing the ability of the locals to import goods. In essence, this situation undermines exportation of products because of the levies, which the government charges. This sends investors to other favorable economies. Public debt may also lead into loss of jobs. The government may resort to lay-offs or freeze employment to tame bloated expenditure bill. The ultimate result of this is reduced purchasing power and low consumption among the affected households.
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