Sample Essay on Impact of Public Debt on Output
Public debt [government debt] is all money that is owed by any branch of government at any given time. It includes debt owed by the state government, federal government, local government, and even the municipal. On the other hand, it is, in impact, an extension of personal debt, since the public makes up the revenue stream of the government. The global financial crisis has led to an increase in public debt and it has impacted the output of many nations. With the change in policies and economic crisis in the world, the public debt will continue to expand in most countries.
A sharp rise in the public debts in many countries can be matched with the financial crisis that erupted in 2007 and intensified in 2008 when the world was hit by an immense economic recession. Within the European region, the public debt has been increasing on yearly basis. However, there are wide variations between countries. This has been a subject of lively debates among economists on the global grid. The impact of fiscal policies has been said to be the main cause of the high rise in government debts. Many governments are said to lack fiscal discipline and this has seen an increase in debt levels.
There are short-term and long-term impacts of public debt on output, gathered from the analysis made from different countries. On a short-term basis, the measures taken to combine the budget are most likely to depress economic growth. The scale of effects of consolidation of budget depends on the monetary and economic environment. The long-term effects of consolidation ensure the sustainability of the public finances. The core effects include a drop in long-term interest rates due to a poor supply of government securities and a decrease in risk premiums.
There are different ways through which an increase or reduction in public debt may have negative or positive effects on the economy or general output of a country. First, an increase in the public debt will correspond to a drop in the positive savings or an increase in the negative savings of the government. This will lead to a reduction in the amount of net national savings. Unfortunately, this will tend to push up interest rates causing a decline in investment and growth of the capital stock.
A slower pace of capital accumulation hinders innovations that increase output or productivity. Hence, the final result will be lower labor productivity. Notably, the impact on lower interest rates will depend on the size of the area affected by an increase in public debt. For instance, if the impact of government debt covers a small open economy, then the effect on the market interest rate will be very modest.
On the other hand, if the debt increases or expands in countries with large economies, there will be an increase in market interest rates and charges largely. The increase in debt will lead to the rise of the sovereign risk and drive the premiums up. The higher premiums creation will lead to an increase in financial expenses which will affect public finances. When government debts are combined with adverse budgetary conditions, they signify the non-linear impact of high debt levels on interest rates.
In a sense, more focus should be on the significance of the initial budget, institutional or structural conditions, and the effects emerging from the financial markets. A few factors that play core roles in determining the scale of the effects of public debt should be put into account. This includes weak institutions, weak flow of foreign capital, and weak competition of the national economy, fragile banking sector, and low private savings. The effect of the aging population on public debts should also be considered.
To reduce public debts, it is wise to achieve and uphold budgetary positions as they will lead to a sharp reduction in public spending. Countries with high public debts should increase participation in the labor market and improve labor productivity as this is a great way to expand the fiscal scope, and education can act as a pivotal factor here. Lastly, affected countries can also take into account reforms to their health systems, arrangements for the care of aging, and the designated pension schemes.
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Online resources:
http://www.nbb.be/doc/ts/publications/EconomicReview/2011/ecorevII2011_H1.pdf
http://noahpinionblog.blogspot.com/2012/03/how-can-debt-affect-potential-gdp.html
http://www.wisegeek.org/what-is-public-debt.htm