Question

Discuss the overall economic effects of government borrowing and government debt retirement. Please explain extensively and include references. Thank you

Answer 1

When the government spends more than it earns through taxes, there is a deficit in the budget.In order to finance the deficit , the government needs to borrow.When government borrowings become large, it reduces the financial capital which is available with the firms in the private sector and leads to crowding out as private sector lends money to the government and thus have less to invest. The government may also need to increase taxes in the future in order to have more money.If the government borrows from abroad , there is danger of capital flight.For eg investors will suffer from devaluation if a country like Greece is forced out of Euro and there is devaluation.So foreign investors will sell and the economy will be under pressure .Borrowing also increases trade imbalances and leads to financial crisis.High level of government borrowing may lead to payment of higher debt interest.It may also create inflationary pressure if the government print notes to meet the crisis.Debt retirement refers to the repayment of debt.The process involves taking back the notes and bonds that have been issued,and then to return the amount collected to those who have purchased the debt .By making a sinking fund at the time of issuing the debt ,debt can be retired.The retirement of the public debt is the most important fiscal problem of the federal government.There are certain issues which affect the budget like rate of retirement, the source of the fund , and the method by which retirement will take place.All these are problems of taxation and expenditure and the creation of surplus for repayment of debt. Debt retirement may lead to deficit in the budget.On the taxation side, the government must generate more revenue or else there will be a deficit in the budget . On the expenditure side of the budget , expenditure should be limited to generate surplus for debt repayment .

References-debt retirement and economic growth,Impacts of government borrowing.