Public debt affects market confidence

The government in any country borrows from the market or other sources in order to bridge the gap between its revenue and expenditure. The money that government owes is known as public debt or national debt.

In case the government runs a deficit on a regular basis and keeps borrowing to finance its expenditure, it keeps adding to the total stock of debt. The total stock of public debt of a country is normally expressed in terms of its size of the gross domestic product (GDP), referred to as debt to GDP ratio.

The implications
Higher borrowing by the government leaves little room for the private sector to borrow for investment. With competition in the debt market, the cost of money will go up. Higher interest rates will affect investment and consumption and will result in lower growth.

Higher public debt also means that the government will spend a large portion of its budget on interest payment, which could affect its other development commitments. However, rise in public debt is not always a bad thing.

There is a chance that government increases its spending in an environment of general economic slowdown. Higher government expenditure will generate demand and help revive economic growth.

The bottom line
It makes more sense to be prudent and restrict government deficit and the stock of public debt at comfortable levels as high debt normally affects market confidence and induces financial instability.

 

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