A Little About Government Debt
What is Debt:
When one party borrows from another, the borrowing party incurs a debt to the lending party that they must repay. A debt is money owed to someone else or another party.
What is Government Debt:
Like individuals and corporations, governments can also incur debt. Government debt can be called sovereign debt, national debt, and country debt. The proper definition of government debt is that it is the net sum of annual federal budget deficits. There are two types of national debt: public debt and intragovernmental debt. Public debt is debt owed to the Federal Reserve, mutual funds, foreign countries, other entities, and other individuals. Intragovernmental debt is debt owed to government departments. Government departments can include Medicare, Military Retirement Fund, Social Security, and other related retirement funds.
Why National Debt Affects You:
No matter what country you are from, national debt can still affect you. When national debt rises to extremely high levels, governments may default on that debt to cut their losses. Also, as the debt grows, it decreases governments investing in the public because they are busy paying off interest costs. Another detriment is the decrease of private investment. Investors that have bought government bonds will want to increase interest rates. Thirdly, government debt can result in fewer economic opportunities for the citizens, and diminishes the government’s ability to respond to possible financial crises. Fourthly, when a government owes other countries a significant amount of debt, national security is challenged as the debt makes the government more indebted to its creditors.
How Governments Can Alleviate The Burden of National Debt:
Governments can also reduce the amount of national debt through various ways. Some of the more common ways include issuing bonds, manipulating interest rates, having budget cuts, raising taxes, and getting debt forgiveness. A government can issue debt with bonds, but also has to repay the investor with the original amount invested and interest. Moving on, manipulating interest rates means that governments can make interest rates lower to create more income and boost the economy, but it isn’t the most effective solution to country debt. The third way of having budget cuts is quite effective, but people who benefit from tax money spending are disgruntled at the cuts which prompts politicians in office to shy away from making such decisions. The fourth way of raising taxes is slightly more effective than low interest rates, but citizens and investors can often be less than pleased. Lastly, debt forgiveness is extremely effective for getting rid of debt as the government does not have to repay its creditors, but also ineffective for maintaining little to no debt.
Written by Allie Chang