Sample Essay on Effects of Public Debt on the Economy
Public debt occurs when the government is spending more than the revenue it collects. At extreme levels, a high public deficit is dangerous as it may lead to the paralysis of an economy. From inflation to high-interest rates, national debts have a wide range of effects. In this essay, we explore the major effect of public debt on the economy of the nation.
The first effect is the increased cost of goods and services in the market. When a country has high national debt, it is almost automatic that the cost of products on the market shoots. This attributed to a series of reasons, which are interlinked. For example, the cost of production goes up because of increased interest rates imposed on borrowed money. Moreover, the cost of raw materials increases, causing the final price of the product to go up. In such an environment, retailers, producers, manufacturers, and other people involved in the chain of supply have to raise their prices in order to make products. The last person to feel these changes in prices is always the consumer when they go the market to buy goods and services to meet their household needs.
Another effect of public debt is that it deprives consumers of their money, leaving them with nothing to spend. This means, there is less purchasing power as people do not have money to spend on consumables. Where does this money go? When an economy is indebted, people become overburdened by mortgages, personal loans, and overdrafts among others. It becomes expensive and almost impossible to repay these credit services and products because of the high-interest rates charged by banks, other financial institutions, and the insufficiency of money among people to spend on goods and services in the market.
When there is no money to spend, it means the goods on the market will not be bought. When the government is struggling with debts, there is a surplus of goods and services because of limited purchasing power. If manufacturers continue producing their products, the trend could result in massive wastage us the goods go un-purchased. However, surplus might not prevail for long as producers adjust their production quantities to meet the demand for the market.
Another effect of the national debt is competition. In most cases, businesses end up reducing the prices of commodities in order to attract customers experiencing limited purchasing power. Because of the prevailing conditions, several scenarios emerge. For example, employers, including the government reduce the wages of their employees. The government does this with the hope of reducing its expenditure even though this could be a drop in the ocean in cases where the deficit has hit abnormal levels. For the private sector, they choose to cut expenses because of the high cost of production.
Besides cutting salaries, public debt may result in massive lay-offs as the government moves to arrest the situation. In most cases, the government may opt to merge some divisions, scrap off some positions or increase the workload of employees by reducing their numbers. This simply breeds unemployment and worsens the living standards as people lose their source of income.
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Retrieved from:
http://www.voxeu.org/article/public-debt-and-economic-growth-one-more-time
http://www.cbsnews.com/news/how-our-national-debt-hurts-our-economy/