Managing national debt is a significant issue that every country in the world must face. While media outlets often report on national debt with forecasts of doom and gloom, it is important to understand that national debt is very complex, and the effects of which, both good and bad, are numerous and far-reaching.
What is national debt?
National debt can be described and measured in several different ways. One simple explanation is that national debt is the amount of public and intragovernmental debt a government owes. A government can owe debt to different parties, including foreign governments and investors, intragovernmental holdings (which is essentially debt that a government owes to itself), and its own citizens. National deficit is a term frequently coupled with national debt, which occurs whenever a government spends more than it earns in a given year. The national debt is the aggregate of national deficits from year to year.National debt is most frequently measured as a ratio of the country’s total debt compared to its Gross Domestic Product (GDP). As of January 2018, the national debt of the United States was 108% of its GDP. Theoretically, if the United States were to spend every cent of revenue on its debt, the amount of money the United States earned would not satisfy the total owed. Other countries, such as Japan, have a debt-to-GDP ratio of up to 250%. While these figures appear overwhelming, a country’s capacity to manage its debt is more important than the actual total amount owed. Whenever a government cannot properly manage its debt, the country defaults.
Is national debt bad?
While debt can sometimes be bad, the ability to accumulate debt (or raising money) is quite helpful. A government uses its borrowed money to provide services to its citizens, such as building infrastructure or for national defense during times of war. Government spending is often funneled to the private sector, which can lead to private surpluses. Individual citizens owning government debt also provides an outlet for safe, guaranteed investments for these individuals.National debt is bad whenever a country defaults. Defaulting means that a government is no longer able to manage its debt, or pay back investors. This often results in capital flight, or the loss of confidence by investors. Individual citizens or the private sector are also less willing to spend money, which can result in less economic growth.A government can pay off its national debt in a variety of ways, including austerity measures that entail significant decreases in government spending, through manipulating its currency to make its exports cheaper, or through the nationalization of industries such as oil and gas.
Case studies in national debt
Every country must manage its debt differently, and every country’s national debt can affect the world differently. The United States has paid off its debt only once in its history, which led to a short term government surplus, but a longer term recession. Iceland successfully navigated a debt crisis by manipulating its currency and allowing its private banks to fail. Other countries, like Greece, are not able to manipulate their currencies due to being tied to the Eurozone. Finally, governments in countries such as Venezuela have lost the confidence of any foreign investors, making it extremely difficult to earn any kind of foreign revenue.