The Impact of National Debt on the Economy

Global services are sponsored by the federal government. Any of these programs are consumption-based and do not produce income. Several factors may increase government spending to the point that a fiscal deficit is created, necessitating borrowing. In the most basic form, the national debt is the money owed by the government. That is the total value of Treasury securities sold by the government to raise funds to cover the fiscal deficit at a given point in time (Von Hagen and Harden 314). The national debt is reduced during surplus years, although it is increased during deficit years. In the deficit year, the government spends more than it receives from the taxes and other sources while in the surplus year the government spends less than it receives (Hargreaves 39). The demographic trends of the US population are the major reason behind the increase in the national debt. The population is composed of more old age people than before making the government to spend more on the social security programs. In fact, there are fears concerning sustainability of the fiscal policy in the coming years (Goldsmith and William 41). Resorting to increasing the federal government debt has consequences which may be either negative or positive depending on how the funds are invested by the government. Ideally, a country is likely experience economic growth if the funds are used to fuel productive activities. This retrospective paper discusses the effect of national debt on the economy.



US national debt trends

The US federal debt today is more than $ 20 trillion. The interest per year stands at about $200 billion and the debt per citizen ranges from $60-$63. The percentage debt as of the percentage Gross Domestic Product stands at 106.5% (Benfratello and Pennacchio 5). The debt has neither been steady nor predictable. It has been fluctuating over the years due to economic dynamics of the country. The US national debt increased steadily in the aftermath of the Second World War and the economic recession. It declined later after this period but started to rise again at a slower rate. There were steady increases in the national debt of the United States from 2010 to 2017 (Baimbridge and Mark 122). The trend is tipped to continue due to demographic dynamics of the country and the heavy expenditure on medical care. The US population is increasingly being composed of more people aged 65 years and above. This demographic trend is increasing the public consumption for social security and medical care. Ideally, when the debt funds such programs, then country continue to encounter deficits which in turn increases national debt (Baimbridge and Mark 123).

Considering public acceptability of national debts, the issuing of the public debt is accepted but with the condition that the funds are used to trigger economic development. However, funding public consumption using the debt may not translate to sustainability in the near future. Public consumptions simply increase the amount the future citizens owe the creditors hence stagnating the county’s economic development. Conversely, when the funds borrowed are used to invest in economic expansion projects, the economic growth of the country is stimulated.





National debt and policy formulation

The critical factor that dictates the growth of economies is the strategic plan of the government's fiscal policy. The properly designed strategic plan would see a countries economy through the challenging and unpredictable uncertainties. Lean strategic plans in formulating the fiscal policy lay a foundation on which the economy thrives. The strategic fiscal plan creates a conducive business environment, more opportunities, and economic prosperity. Consequently, the country will have access to capital for investments, more resources to fund economy-stimulating projects, improved consumer satisfaction and investor confidence, and firm safety net. However, if the fiscal policy does not result in the growth of the economy into the foreseeable future; the converse is true. The economic crises arise from weak supportive structures, reduced creation and access to capital, economic deterioration, and lack of confidence in the investors if the fiscal imbalance, in the long run, is not well addressed by the policymakers. The resultant economy will present fewer opportunities for citizens hence magnifying the economic setbacks such as high unemployment and inflation rates. Therefore, in the quest of then government maintaining of the balance in the fiscal expenditure, it should ensure flexibility and workability of the policy to propel the country to sustainable development in the future.













The negative effects of the national debt

Negative impacts result from public borrowing especially if the fiscal policy is flawed. Consequently, unrealistic plans and lack of proper planning in the utilization of the public debt funds is rendered a flawed move.



Reduced public investment

The federal debt of the United States is increasing steadily year in year out. The increase translates to a subsequent increase in the interest rates payable along with the debt. The trend is threatening to the public investment projects since it depletes the resources for these investments. As such, the government will have less to invest in the economy-stimulating projects that create more capital and opportunities for investors. As the US experience slight increases in the economic growth, the government will be forced to borrow more to fund the budgetary deficits hence a dip in the productive investments at the expense of funding the economy non-productive accumulating interest rates (Panizza and Presbitero 35).

The increase in the interests

The government invests heavily in education sector, the Research and Development, and construction of strong and reliable infrastructure. However, the projected increases in the interest rates is to be two times more than what the government has been spending on Research and Development, education and infrastructure (Panizza and Presbitero 35). The trend presents a sharp rise in the interest rates between 2017 and 2047, that is, from 1.4% to 6.2% (Benfratello and Pennacchio 6). This is the largest ever increase in the American economic history and the greatest blow to the US economy.



Fueling the increase in the interest rates

Two major factors contribute to the increased borrowing by the government; the demographic trends, and the rising healthcare costs. The most significant factor that fuels the increasing interests that result from increased government borrowing is the US demographics. The number of people who have attained 65 years and above has steadily increased faster than the working population. Productivity has been lowered, and the beneficiaries of the old age social funds are increasing (Panizza and Presbitero 36). As such, the treasury's funds are depleting. The sector is projected to run bankrupt in the 2030's hence the necessity of more borrowing. The second factor is the increasing health care costs. America tops the world regarding investing in the healthcare second with a flying $9, 020 which is three times more than the world's average investments amongst the top countries. The healthcare system shows the trend due to the aging population of the US which consumes the largest part of the funds (65%). This reveals the doubts on the workability of the current fiscal policy of the US that is operating inefficiently.

Reduced private investments

The private investors are inspired by opportunities created by the fiscal policy and access to capital. If the two components are weakened, investments in the private sector are likely to dip sharply. The increasing government debts reduce the amounts of the nation’s capital share available for the investors. This is partly due to ever-increasing interest rates coupled with lower investments in supportive business structures and equipment. As such, the entrepreneurs face the problem of the high cost of accessing capital for investment. The innovation is stifled and hence a reduction in the number of new breakthroughs that better the lives of people. This trend reduces the productivity of the people breeding problems such as unemployment and subsequent inflation. Furthermore, the interest rates on the national borrowing may increase due to the investors’ doubts that the government may pay the debts.

Possibility of inflation

During the American Revolution in the 19th century, the people started enjoying relatively lower prices of commodities. The rapid increase in the quality and quality products made it possible for elevated standards of living (Hartwell and Ronald Max 55). However, with increasing interest rate offered on the government’s treasury securities, the corporate business world would appear riskier hence necessitating a rise in the yields of the newly issued bonds. Consequently, the companies will raise the prices of their goods and services to fund the increase in their debt service obligations. It will ultimately lead to increased prices of goods and services hence resulting in higher levels of inflation.

Lower living standards

Increased borrowing fuels inflation in the country due to a subsequent increase in prices of commodities. Rising prices reduce the standards of living of people since they need to make more to buy less. The more the government borrowing the higher the interest rates hence magnification of the burden of repaying the debts. Therefore, the likelihood that the government defaults the payments is high. As such, the investor will be discouraged from buying more newly issued treasury bills. The government raises the yield on the newly issued treasury bills to attract the investors to buy; a move that reduces the available tax income to fund its operations. The reduction in the amount of tax revenue available for government spending is as a result of more tax revenue funding the debts and the interests at the expense of funding the productive public projects. Lack of incentives to invest in the income and opportunity generating projects lower the living standards of the people by lowering their income, locking out on entrepreneurial aspirations and lack of access to capital.

Living standards define the well-being of the people. Deterioration of the economy as a result of unregulated borrowing may as well limit employment opportunities. The income generating opportunities heavily depend on the government investment in the infrastructure that supports running of the business. Diversion of funds to clear debts discourages the establishment of more productive activities that generate income opportunities to the youths hence lowering their standards of living depression (Panizza and Presbitero 40). Consequently, obtaining loans to purchases property may as well be difficult due to high-interest loan resulting from minimal government reserves.

Fewer opportunities for the individual and families

The Congressional Budget Office (CBO) has identified several budgetary challenges that may affect the US economy in the future. CBO projects that the deficit may reach $1 trillion by 2023 and over $10 trillion in the coming ten years. The trend will fuel more borrowing for the country to sustain its economy longer. The borrowing trends will impact seriously on the availability of opportunities for the people to exploit for economic gains. The CBO has projected that there will be a reduction in the real income for a four-person family by an average of about $16,000 by 2047 with increasing debt. Additionally, the increasing debt will divert more funds to repaying the debts at the expense of building structures to enable economic activities to run place smoothly.





Consequently, the people will not have good investment opportunities to generate income for their families. The education sector will as well stagnate due to lower investments hence lack of skills among workers. This leads to low production in the manufacturing plants. Lower investments in the Research and Development will make the country lose the innovative edge hence stifling industrial and technological development (Azzimonti and Quadrini 97). For instance, research and development plays a very vital role in the success of an economy. It contributes to efficiency and sustainability of a country’s economic structures. Research and Development is the platform that nourishes growth of creativity and innovation. The creative breakthroughs enable a country possess a competitive edge over the rival countries producing the same products hence leading to economic growth. The Rate on Investment (ROI) may take a longer period of time to be realized. However, the moment returns starts creeping in, the people are likely to benefit from the astronomical incomes R&D is able to bring to a country when prioritized. Industries that arise from R&D create many employment opportunities and raises the per capita income of the country to greater margins.



Limited fiscal flexibility

The complexity of the US economy presents many risks. The risks are presented by the dynamic economic world that is full of surprise uncertainties. Amid anticipation of many emergencies such as economic recessions, war and terror attacks, and unknown circumstances, the US needs to be flexible enough in preparation for such occurrences. Increased debts will limit the country’s ability to give the best responses in the wake of such risky circumstances (Panizza and Presbitero 39). Research has shown that America recovered faster from the Great Recession partly because it had a lower debt which was at 35% of the GDP (Temin and Peter 145). The U.S provided more flexibility regarding the allocation of funds to the priorities that guaranteed escape from a falling economy. If the debt was at 106% of GDP as it is now, the country could have struggled out of the Great Recession.

Crowding out

The US treasury bills are considered not to have risks on their returns on investment. As such, investments such as the equity investments and corporate debt will lose meaning and attraction. This makes it challenging for businesses to generate the pre-tax revenue enough to a considerable risk premium on the treasury bonds and dividends on stock that justifies their investment. This is called the crowding out effect. The trend stems from heavy government borrowing that tends to absorb the economy's lending capacity and hindering corporations from making capital investments because of a substantial increase in the real interest rate (Panizza and Presbitero 39). This phenomenon tends to encourage the growth of the government owed sectors and stagnation of the private sector. This creates an imbalance between the private and the public sector hence reduces production.

The positivity in the Federal Borrowing

The national debts always comes to the rescue of the government whenever there are budgetary deficits. The funds obtained from the sale of the treasury bonds are used to invest in sectors such as agriculture, Education, and Research and Development that propel a country to more economic gain. Ideally, with lean fiscal policies, the US can gain enormous economic growth that can help offset the interests that accrue to the government when it borrows from the public. In the US, there is an increasing number of the people aged 65 years and above. The social security programs’ resources are being overstretched by the increased amount of payouts resulting from the increased number of beneficiaries of the programs. The life expectancy is high coupled with improved sanitation and medical care. The three aspects are contributing to a steady increase in the number of unproductive old age people. The management of such payouts and maintaining public projects, simultaneously, stretches government funds to the maximum limits hence the need for borrowing. Therefore, federal debts enable the government fund critical operations as policymakers are given time to articulate agile policy strategies for long-term solutions.

The use of borrowing is a better option compared to use of politically damaging taxes. Such borrowed funds can be used during war and the onset of natural calamities to protect lives and property. Additionally, borrowing acts as a stabilizer to the economy during the time of an economic recession when the cost of unemployment benefits increase steadily. The economic growth stimulated by investing the borrowed funds offsets the real burden of the debt. The benefits may be far-reaching than measurement tools can reveal.

Conclusion

Conclusively, government borrowing makes it possible for the government to access more funds to supplement the tax revenue in funding major programs. Over the past years, governments have depended on borrowing so much to invest in sectors such as agriculture, education, and other infrastructures. The borrowing has led to controversies since the national debt is always increasing. Continuous borrowing without sound fiscal policies may lead a country into an economic slump. Interests cost are the center of the tension since they are increasing at an unexpected rate. Interests do not add value to the borrowed funds, but they are rather paid as a gain to the creditors. For the US, interest rates are projected to double from $269 in 2017 to about $800 in 2027. Consequently, this growth will crowd out significant investment such as infrastructure, education, and Research and Development. Despite the negative impacts of heavy borrowing, national debts have been used to fuel economic growth through productive projects.









































Works cited

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Baimbridge, Mark, et al. "The Eurozone Crisis: Current Account Imbalances, Budget Deficits and National Debt." The Segmentation of Europe. Palgrave Macmillan, London, 2017. 119-140.

Benfratello, Luigi, Alfredo Del Monte, and Luca Pennacchio. "Corruption and public debt: a cross-country analysis." Applied Economics Letters (2017): 1-5.

Hargreaves, Eric L. The national debt. Routledge, 2013.

Hartwell, Ronald Max. The Industrial Revolution and economic growth. Vol. 4. Taylor & Francis, 2017.

Panizza, Ugo, and Andrea F. Presbitero. "Public debt and economic growth: is there a causal effect?." Journal of Macroeconomics 41 (2014): 21-41.

Temin, Peter. "Great Depression." Banking Crises. Palgrave Macmillan UK, 2016. 144-153.

Von Hagen, Jürgen, and Ian Harden. "National budget processes and fiscal performance." European Economy Reports and Studies 3.1994 (1994): 311-418.