Question

QUESTION 3 Public debt arises as a result of financing successive budget deficits through borrowing. The public debt stock as at March 2020 stood at GHC 236.1 billion according to the Bank of Ghana. There have been arguments for and against borrowing by government and the opposition all these years depending on where they find themselves.

As a student of Public Finance, is borrowing good or bad? Justify your position by coming out with all the relevant arguments for and against your decision. (15 marks)

Answer 1

Government borrows through issue of government securities called G-secs and Treasury Bills. Borrowing is a loan taken by the government and falls under capital receipts in the Budget document. It is essentially the total amount of money that the central government borrows to fund its spending on public services and benefits. As the tax and non-tax revenue fall short in financing government's spending programme, the government announces an annual borrowing programme in the Budget.

Bulk of government's fiscal deficit comes from its interest obligation on past debt. If the government resorts to larger borrowings, more than what it has projected, then its interest costs also go up risking higher fiscal deficit. That hurts government's finances. Larger borrowing programme means that the public debt will go up and especially at a time when the GDP growth is subdues, it will lead to a higher debt-to-GDP ratio.

This gap between income and spending is subsequently closed by government borrowing, increasing the national debt.

An increase in the fiscal deficit, in theory, can boost a sluggish economy by giving more money to people who can then buy and invest more.

Long-term deficits, however, can be detrimental for economic growth and stability.

But at the end we can conclude that borrowing is good because of which government can spend more in the economy .