What is national debt burden and how does it work?

November 26, 2014

Find out how national debt burden accrues and what are its consequences and solutions.

What is national debt burden and how does it work?

National debt

Just like individuals and companies, countries borrow money from each other and from banks all the time. They also borrow money from their citizens in the form of government bonds, which are generally very reliable, low interest investments for long-term money storage.

  • Every country borrows money. It can be for a variety of reasons, like paying for large infrastructure projects, funding wars, paying pension liabilities, developing the means to extract resources and the like.

How much debt is too much?

This is a complex issue and no one can say with certainty exactly how much debt is too much.

  • A general principle is that if the government in question is borrowing money just to pay off the interest on its debts, the burden has gotten far too high.

Debt cycle

This creates a debt cycle that is very difficult to get out of, barring a huge economic boom. And economic booms are more uncommon in nations with high debt burdens.

Debt-to-GDP ratios

Debt burdens are often measured in terms of the percentage of Gross Domestic Product (GDP) they represent.

  • So for example, if a country produces $1 billion of economic activity per year and they have a $500 million debt, the debt is 50 per cent of the GDP.
  • Many countries hover between 40 and 80 per cent debt-to-GDP ratios, and some go up as high as 200 per cent and more.
  • Many economists consider approximately 100 per cent to be too much, though of course the numbers are not set in stone.

What are the consequences of high national debt burdens?

The effects of high debt burdens vary, but they can include increased inflation, higher interest rates, slowing economic growth and collapsing currency values.

These things are all interrelated so it's difficult to separate them into individual causes.

What can nations do about debt burden?

This is a tough question to answer and it's the source of much heated debate. Of course economic booms are great, but how you make those happen is a lot less clear.

  • Some people believe increasing taxes can help pay for debt, while others believe the opposite, that decreasing taxes encourages growth and by extension helps the country in question get out of debt.
  • The answer is ultimately unknown, and probably depends a great deal on the particular circumstances of the country in question.
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