Public Debts

Public Debt (% of GDP)

 Public debt, sometimes also referred to as government debt,

represents the total outstanding debt (bonds and other
securities) of a country’s central government. It is often
expressed as a ratio of Gross Domestic Product (GDP).
Public debt can be raised both externally and internally,
where external debt is the debt owed to lenders outside the
country and internal debt represents the government’s
obligations to domestic lenders. Public debt is an
important source of resources for a government to finance
public spending and fill holes in the budget. Public debt as
a percentage of GDP is usually used as an indicator of the
ability of a government to meet its future obligations.
The public debt is how much a country owes to lenders
outside of itself. These can include individuals,
businesses, and even other governments. The term
"public debt" is often used interchangeably with the
term sovereign debt.
Public debt usually only refers to the national debt.
Some countries also include the debt owed by states,
provinces, and municipalities. Therefore, be careful
when comparing public debt between countries to make
sure the definitions are the same.
Regardless of what it's called, public debt is the
accumulation of annual budget deficits. It's the result of
years of government leaders spending more than they
take in via tax revenues. A nation’s deficit affects its debt
and vice-versa.
Public Debt vs. Gross External Debt
Don't confuse public debt with gross external debt.
That's the amount owed to foreign investors by both
the government and the private sector. Public debt
impacts external debt, but they are not one and the
same. If interest rates go up on the public debt, they
will also rise for all private debt. That's one reason
most businesses pressure governments to keep public
debt within a reasonable range.
Public Debt vs. Gross External Debt
Don't confuse public debt with gross external debt.
That's the amount owed to foreign investors by both
the government and the private sector. Public debt
impacts external debt, but they are not one and the
same. If interest rates go up on the public debt, they
will also rise for all private debt. That's one reason
most businesses pressure governments to keep public
debt within a reasonable range.
 When Is Public Debt Bad?
 Governments tend to take on too much debt because the benefits
make them popular with voters. Increasing the debt allows
government leaders to increase spending without raising taxes.
Investors usually measure the level of risk by comparing debt to a
country's total economic output, which is measured by GDP. The
debt-to-GDP ratio gives an indication of how likely the country is
to pay off its debt.
 Investors usually don't become concerned until the debt-to-GDP
ratio reaches a critical level. The World Bank has said the tipping
point is 77% or more.When debt approaches a critical level,
investors usually start demanding a higher interest rate. They want
more return for the greater risk. If the country keeps spending,
then its bonds may receive a lower credit rating. This indicates how
likely it is that the country will default on its debt.
 As interest rates rise, it becomes more expensive for a
country to refinance its existing debt. In time, income has
to go toward debt repayment, and less toward
government services. Much like what occurred in Europe,
a scenario like this could lead to a sovereign debt crisis.
 In the long run, public debt that's too large causes
investors to drive up interest rates in return for the
increased risk of default. That makes the components of
economic expansion, such as housing, business growth,
and auto loans, more expensive. To avoid this burden,
governments need to carefully find that sweet spot of
public debt. It must be large enough to drive economic
growth but small enough to keep interest rates low.
Causes of Borrowing
 Public Debt Government can borrow because it can
possible that local income was not enough for their
expenditure due to incidental expenditure government
could have to borrow because it is not possible to increase
the tax income at that point. Government can borrow
finance arrangement of capital expenditure because
current revenue will not be enough to fulfil the target. At
the time of depression, when private demand is not enough
then government borrow, the extra savings of people which
is not in use and spends it to increase the effective demand
and by this gives birth to the extra income and employment
in the society. These extra amounts from government taxes
are supplementary to each other
1. Small Share of Taxes in National Income.
 2. Burden of Indirect Taxes: In the economy there is
an inflation increase in indirect taxes that the
complete tax arrangement has become imbalance and
unjust. Most of the pressure of taxes are from in
indirect taxes the lower class people who have to face
as comparison to rich section so this increase,
economical problems in society. In its opposite, on
lower section the tax pressure is equal to the part of
lion and the ability to face is equal to the baby sheep”.
3. Imperfect Tax System.
4. Misuse of Public Income: A big part is spent on
undeveloped plans, except this some plans are started
on the basis of standard. A big quantity is spent on
them even public got no gain from these. By this
reason, there is a reduction in production.
Negative impact of Rising Debts
Reduced Public Investment.
the government will spend more of its budget on interest
costs, increasingly crowding out public investments.
Negative impact of Rising Debts
 Reduced Private Investment.
Public borrowing competes for funds in the nation’s capital
markets, thereby raising interest rates and crowding out new
investment in business equipment and structures.
Entrepreneurs face a higher cost of capital, potentially stifling
innovation and slowing the advancement of new breakthroughs
that could improve our lives. At some point, investors might
begin to doubt the government’s ability to repay debt and could
demand even higher interest rates — further raising the cost of
borrowing for businesses and households. Over time, lower
confidence and reduced investment would slow the growth of
productivity and wages of workers.
Negative impact of Rising Debts
Fewer Economic Opportunities for Individual.
Growing debt also has a direct effect on the economic
opportunities available for Individual. If high levels of
debt crowd out private investments in capital goods,
workers would have less to use in their jobs, which
would translate to lower productivity and, therefore,
lower wages.
Negative impact of Rising Debts
Greater Risk of a Fiscal Crisis.
If investors lose confidence in the nation’s fiscal
position, interest rates on public borrowing could rise as
higher yields would be demanded to purchase such
securities.
A rapid increase in Treasury rates could also lead to
higher rates of inflation, which would reduce the value
of outstanding government securities and result in
losses by holders of those securities which could further
destabilize the economy and erode confidence in
currency on an international scale.