government debt essay

Page One Economics ®

Making sense of the national debt.

"Blessed are the young for they shall inherit the national debt." 

—Herbert Hoover

We live in a world of scarcity —which means that our wants exceed the resources required to fulfill them. For many of us, a household budget constrains how many goods and services we can buy. But, what if we want to consume more goods and services than our budget allows? We can borrow against future income to fulfill our wants now. 1 This type of spending—when your spending exceeds your income—is called deficit spending. The downside of borrowing money, of course, is that you must repay it with interest, so you will have less money to buy goods and services in the future. 

2018 U.S. Federal Deficit

In 2018 the federal deficit was $779 billion, which means that the U.S. federal government spent $779 billion more than it collected. 

SOURCE: https://datalab.usaspending.gov/americas-finance-guide/ . Data are provided by the U.S. Department of the Treasury and refer to fiscal year 2018.

Governments face the same dilemma. They too can run a deficit, or borrow against future income, to fulfill more of their citizens' wants now (Figure 1). For a variety of reasons, governments may borrow rather than fund spending with current taxes. Deficit spending can be used to invest in infrastructure, education, research and development, and other programs intended to boost future productivity. Because this type of investment can increase productive capacity , it can also increase national income over time. And deficit spending can be used to create demand for goods and services during recessions.  

For the U.S. government, deficit spending has become the norm. In the past 90 years, it has run 76 annual deficits and only 14 annual surpluses. In the past 50 years, it has run only 4 annual surpluses. 2 The accumulation of past deficits and surpluses is the current national debt : Deficits add to the debt, while surpluses subtract from the debt. At the end of the first quarter of 2019, the total national debt, also called total U.S. federal public debt, was $22 trillion and growing. This circumstance raises important questions: How much debt can an economy sustain? What are the long-term risks of high debt levels? 

Who "Owns" the National Debt?

While individuals borrow money from financial institutions, the U.S. federal government borrows by selling U.S. Treasury securities (bills, notes, and bonds) to "the public." For example, when investors purchase newly issued U.S. Treasury securities, they are lending their money to the U.S. government. The purchaser may receive periodic payments and/or a final payment, known as the "face value," at the end of the term. You or someone close to you likely holds U.S. Treasury securities either directly in an investment portfolio or indirectly through a mutual fund or pension account. As such, you, or they, own U.S. government debt. But, as a taxpayer, you are also beholden to pay part of that debt. A majority of the national debt is held by "the public," which includes individuals, corporations, state or local governments, Federal Reserve Banks, and foreign governments. 3 In other words, debt held by the public includes U.S. government debt held by any entity except the U.S. federal government itself (Figure 2). The largest public holders of U.S. government debt are international investors (40 percent), domestic private investors (38 percent), Federal Reserve Banks (15 percent), and state and local governments (6 percent). 4

Fiscal Year 2018 Debt Held by the Public and Intragovernmental Debt

SOURCE: https://www.gao.gov/americas_fiscal_future?t=federal_debt , accessed September 5, 2019.

In addition to owing money to "the public," the U.S. government also owes money to departments within the U.S. government. For example, the Social Security system has run surpluses for many years (the amount collected through the Social Security tax was greater than the benefits paid out) and placed the money in a trust fund. 5 These surpluses were used to purchase U.S. Treasury securities. Forecasts suggest that as the population ages and demographics change, the amount paid in Social Security benefits will exceed the revenues collected through the Social Security tax and the money saved in the trust fund will be needed to fill the gap. In short, some of the $22 trillion in total debt is intragovernmental holdings—money the government owes itself. Of the total national debt, $5.8 trillion is intragovernmental holdings and the remaining $16.2 trillion is debt held by the public. 6 Because debt held by the public represents debt payments external to the government, many economists feel it is a better measure of the debt burden. 

Household and Government Financing Over the Life Cycle 

The life cycle theory of consumption and saving holds that households seek to smooth their consumption of goods and services over the life cycle by borrowing early in life (for college or to buy a home), then saving and paying down debt during their working careers, and finally living on their savings during retirement. Financial advisors often suggest that people try to be debt free before they retire. As such, people are often motivated in their prime working years to pay down their debts and then pay them off entirely before they quit working. Given this mindset, people often assume that government debt must be paid in full at some point. But there are important differences between government debt and household debt.

While people tend to prefer to pay off their debts before they retire (and stop earning income) or die, governments endure indefinitely. In general, governments expect that their economies will continue to grow and that they will continue to collect tax revenue. If governments need to refinance past debts or cover new deficits, they can simply borrow. In effect, governments never need to pay off their debts entirely because the governments will exist indefinitely. 

However, this does not mean that debt is without cost. It is important to understand that debt has an opportuni ty cost . For the 2018 fiscal year, interest payments on the U.S. national debt were $523 billion. 7 This money could have financed other projects if the debt did not exist. And, of course, that $523 billion was simply the interest on the existing debt and did not pay down that debt.

How Much Debt Is Too Much Debt?

Although governments may endure indefinitely, that does not mean they can accumulate unlimited debt. Govern­ments must have the necessary income to finance their debt. Economists use gross domestic product (GDP), the total market value, expressed in dollars, of all final goods and services produced in an economy in a given year, as a measure of national income. Because GDP indicates national income, it also indicates the potential income that can be taxed, and taxes are a primary source of government revenues. In this way, a nation's GDP determines how much debt can be supported, which is similar to how a person's income determines how much debt that person can reasonably take on. Just as individuals can sustain higher debt as their incomes increase, economies can sustain higher debt when the economy grows over time. However, if debt grows at a faster rate than income, eventually the debt might become unsustainable. Econ­omists use the debt-to GDP ratio to measure how sustainable the debt is (Figure 3). Some economists, referred to as "owls," suggest that people's worries about U.S. government debt are overblown (see the boxed insert, "Deficit Hawks, Doves, and…Owls?"). 

Federal Debt Held by the Public as Percent of Gross Domestic Product

Federal debt held by the public has grown faster than GDP, lead ing to a rising debt-to-GDP ratio.

NOTE: Gray bars indicate recessions as determined by the National Bureau of Economic Research (NBER).

SOURCE: U.S. Office of Management and Budget. FRED ® , Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=lKfK, accessed September 5, 2019. 

The Government Accountability Office (GAO) suggests that the U.S government debt is currently on an unsustainable path: The federal debt is projected to grow at a faster rate than GDP for the foreseeable future. A significant portion of the growth in projected debt is to fund social programs such as Medicare and Social Security. Using debt held by the public (instead of total public debt), the debt-to-GDP ratio averaged 46 percent from 1946 to 2018 but reached 77 percent by the end of 2018 (see Figure 3). It is projected to exceed 100 percent within 20 years. 8  

Credit risk is the risk to the lender that the borrower will not repay the loan. It is one component of the interest rate that borrowers pay. Like for all loans, interest rates on Treasury securities reflect risk of default . The higher the risk of default, the higher the interest rate investors will expect: A country perceived as a higher credit risk must pay bond holders higher interest rates than a country perceived as a lower credit risk, all else equal. Thus, when bond yields spike, it might reflect rising risk. 

Economist Herb Stein once said, "If something cannot go on forever, it will stop." In other words, trends that are unsustainable will not continue because the economy will adjust, sometimes in abrupt and jarring ways. While governments never have to entirely pay off debt, there are debt levels that investors might perceive as unsustainable. A solution some countries with high levels of unsustainable debt have tried is printing money. In this scenario, the government borrows money by issuing bonds and then orders the central bank to buy those bonds by creating (printing) money. History has taught us, however, that this type of policy leads to extremely high rates of inflation ( hyperinflation ) and often ends in economic ruin. Some of the better-known examples of such polices are Germany in 1921-23, Zimbabwe in 2007-09, and Venezuela currently. An important protection against this type of policy is to create an independent central bank that is insulated from the political process and has clear objectives (such as a specific target for the inflation rate) so that it can make policy decisions to sustain economic health over the long run rather than respond to political pressures. 9  

Conclusion 

The national debt is high by historical standards—and rising. People often assume that governments must pay off their debts in the same way that individuals do. How­ever, there are important differences: Governments (and their economies) do not retire, and governments do not die (or don't intend to). As long as their debt payments remain sustainable, governments can finance their debt indefinitely. And if a government prints money to solve its debt problem, history warns that hyperinflation and financial ruin will likely result. While debt in itself is not a bad thing, it can become dangerous if it becomes unsustainable.

1 Households could alternately spend out of past savings. 

2 U.S. Office of Management and Budget, "Federal Surplus or Deficit." FRED®, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=otZF , accessed September 5, 2019.

3 U.S Department of the Treasury, Bureau of the Fiscal Service. "Frequently Asked Questions about the Public Debt." https://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm#DebtOwner , accessed September 5, 2019.

4 U.S. Government Accountability Office. "America's Fiscal Future: Federal Debt." https://www.gao.gov/americas_fiscal_future?t=federal_debt , accessed September 5, 2019.

5 Social Security Administration. "Trust Fund Data." https://www.ssa.gov/oact/STATS/table4a3.html , accessed September 5, 2019.

6 U.S. Department of the Treasury, Bureau of the Fiscal Service. "Federal Debt Held by the Public." FRED ® , Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/graph/?g=mAfK , accessed September 5, 2019.

7 U.S Department of the Treasury, Bureau of the Fiscal Service. "Interest Expense on the Debt Outstanding." https://www.treasurydirect.gov/govt/reports/ir/ir_expense.htm , accessed September 5, 2019.

8 U.S. Government Accountability Office. "America's Fiscal Future." https://www.gao.gov/americas_fiscal_future?t=fiscal_forecast#projecting_the_future , accessed September 5, 2019.

9 Waller, Christopher. "Independence + Accountability: Why the Fed Is a Well-Designed Central Bank." Federal Reserve Bank of St. Louis Review , September/October 2011, 93 (5), pp.  293-301; https://files.stlouisfed.org/files/htdocs/publications/review/11/09/293-302Waller.pdf .

© 2019, Federal Reserve Bank of St. Louis. The views expressed are those of the author(s) and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Default: The failure to promptly pay interest or principal when due. 

Fiat money: A substance or device used as money, having no intrinsic value (no value of its own), or representational value (not representing anything of value, such as gold).

Hyperinflation: A very rapid rise in the overall price level; an extremely high rate of inflation.

Inflation: A general, sustained upward movement of prices for goods and services in an economy.

National debt: The accumulation of budget deficits. Also known as government debt.

Opportunity cost: The value of the next-best alternative when a decision is made; it's what is given up.

Productive capacity: The maximum output an economy can produce with the current level of available resources.

Scarcity: The condition that exists because there are not enough resources to produce everyone's wants.

U.S. Treasury securities: Bonds, notes, bills, and other debt instruments sold by the U.S. government to finance its expenditures.

Cite this article

Subscribe to Our Newsletter

Stay current with brief essays, scholarly articles, data news, and other information about the economy from the Research Division of the St. Louis Fed.

SUBSCRIBE TO THE RESEARCH DIVISION NEWSLETTER

Research division.

• Legal and Privacy

One Federal Reserve Bank Plaza St. Louis, MO 63102

Information for Visitors

Numbers, Facts and Trends Shaping Your World

Read our research on:

Full Topic List

Regions & Countries

• Publications
• Our Methods
• Short Reads
• Tools & Resources

Read Our Research On:

5 facts about the U.S. national debt

President Joe Biden and the Republican-controlled House of Representatives appear to be on a collision course over raising the statutory limit on the national debt. House Republicans say they want Biden to accept significant (but unspecified) spending cuts in exchange for raising the limit. But the president has insisted that raising the limit – which allows the government to continue paying its obligations under the law on time – shouldn’t be a budgetary bargaining chip.

Public concern about federal spending is on the rise. In a new Pew Research Center survey about the public’s policy priorities, 57% of Americans cited reducing the budget deficit as a top priority for the president and Congress to address this year, up from 45% a year ago. Concern has risen among members of both parties, although Republicans and Republican-leaning independents are still far more likely than Democrats and Democratic leaners (71% vs. 44%) to view cutting the deficit as a leading priority. (When the government spends more than it takes in, it borrows to make up the difference. The debt, therefore, can be seen as the accumulated sum of previous years’ deficits that is still outstanding.)

Federal borrowing has essentially already hit the current debt limit of $31.38 trillion, though Treasury Secretary Janet Yellen has said she can use a variety of accounting maneuvers to postpone a government default for a few months. So far, neither the administration nor the House is budging from the positions they’ve staked out, so the standoff continues.  

With that in mind, here’s a primer on the national debt of the United States. (For more on the statutory debt limit, read “Why does the U.S. have a debt limit, anyway?” below.)

Aside from Denmark , the United States is the only country with a law setting a specific monetary limit on its national debt. (Australia enacted such a limit during the 2007-09 global financial crisis, only to repeal it a few years later.)

Some other countries have debt caps linked to their gross domestic product, meaning that as their economies grow the monetary value of the debt limit rises as well. European Union member countries, for example, are supposed to keep their public debts to no more than 60% of GDP, though in practice many countries are well in excess of that limit and enforcement has been inconsistent. (The EU limit was suspended during the COVID-19 pandemic but is due to return later this year.) And a handful of other countries, including Kenya and Malaysia , have laws limiting their public debt to a percentage of GDP, though those limits seldom generate the kind of recurring political battles that the U.S. debt limit does.

The U.S. has had public debt for longer than it’s been a country , but it managed to get along without a debt limit for more than a century and a half. The standard practice was for Congress to authorize specific debt issues for specific purposes – $11.25 million to fund the Louisiana Purchase , $500 million to wage the Civil War , $130 million to build the Panama Canal , and so forth. Along with the size of the bond issue, Congress might also specify the bonds’ denominations, interest rates, maturity dates, early redemption rules, and other terms and conditions.

But when the U.S. entered World War I in 1917, it was confronted with the need to borrow unprecedented sums of money. By the time the Treaty of Versailles formally ended the war in 1919, the U.S. had sold $21.5 billion in bonds , along with $3.45 billion in short-term certificates, with varying lengths, interest rates, redemption rules and tax treatments. Administering and paying down that debt proved to be too complex for Congress to micromanage.

The laws authorizing the World War I bonds – primarily what became known as the Second Liberty Bond Act – originally spelled out in some detail the terms and conditions of each bond issue. But throughout the 1920s and 1930s, as the various bond issues approached maturity and had to be either paid off or refinanced, Congress gave the Treasury Secretary more and more discretion to issue new and different types of debt securities – short-, medium- and long-term – under terms the secretary thought best.

Gradually, the specifications in the Second Liberty Bond Act (which in amended form came to govern most government borrowing) were replaced by broad caps. In 1939, the few remaining limits were replaced by an overall $45 billion cap that covered nearly all public debt – the birth of the statutory debt limit as we know it today.

Most of this analysis deals with “total public debt outstanding,” which excludes roughly $19 billion in debt issued by Fannie Mae, Freddie Mac and a few other government-sponsored enterprises. Of the nearly $31.46 trillion or so in public debt, about $73.5 billion is not subject to the statutory debt limit ; most of that represents the accounting treatment of certain Treasury securities sold at a discount to their face value ($68.2 billion) and debt held by the Federal Financing Bank ($4.8 billion).

The Treasury Department makes available extensive information on U.S. public debt, from detailed analyses of its composition and ownership to the exact daily balance, calculated down to the penny . For this analysis, Pew Research Center used data from several of these publications and datasets, but our primary source was the department’s Monthly Statement of the Public Debt .

Data on gross domestic product came from the federal Bureau of Economic Analysis . Figures on interest payments on the debt and overall federal spending came from the Office of Management and Budget . FRED, a database of economic and financial data maintained by the Federal Reserve Bank of St. Louis, was our source for historical data on the Fed’s holdings of government debt.

The federal government’s total public debt stood at just under $31.46 trillion as of Feb. 10, according to the Treasury Department’s latest daily reckoning . Nearly all of that debt – about $31.38 trillion – is subject to the statutory debt limit, leaving just $25 million in unused borrowing capacity.

For several years, the nation’s debt has been bigger than its gross domestic product, which was $26.13 trillion in the fourth quarter of 2022 . Debt-to-GDP is a useful metric for analyzing the debt over long time spans, as it puts the debt into relative terms by comparing it against the size of the national economy. Looked at this way, debt as a share of GDP has gone through three main growth phases in recent decades. These have corresponded with periods when the federal government ran large budget deficits: the Reagan-Bush years of the 1980s and early 1990s; the 2008 financial crisis and subsequent Great Recession ; and the pandemic-caused recession of 2020, when federal debt spiked to an all-time high of 134.8% of GDP. The ratio has come down a bit since but remains well above pre-pandemic levels.

While U.S. government debt is perhaps the most widely held class of security in the world, 21.8% of the public debt, or $6.87 trillion, is owned by another arm of the federal government itself. That includes Medicare; specialized trust funds, such as those for highways and bank deposit insurance; and civil service and military retirement programs. But the biggest chunk of those “intragovernmental holdings” belongs to Social Security. As of the end of January, the program’s retirement and disability trust funds together held more than $2.8 trillion in special non-traded Treasury securities, or 9% of the total debt. (For many years, Social Security collected more in payroll taxes than it paid out in benefits; the surplus was required by law to be invested in Treasuries. That made Social Security, for a time, the federal government’s single biggest creditor.)

Today, the Federal Reserve System is the single largest holder of U.S. government debt. While the Fed regularly buys and sells Treasury securities to execute monetary policy, it bought Treasuries in massive quantities during the COVID-19 pandemic in an effort to keep the U.S. economy from buckling under the strain of shutdowns and quarantines.

At its peak in April 2022, the Fed held more than $6.25 trillion in U.S. government debt, more than double its holdings just before the pandemic hit the U.S. in March 2020. Even as the Fed has begun to scale back its holdings, it held nearly $6.1 trillion in government bonds – almost a fifth of the entire public debt – as of Sept. 30, 2022, the most recent data available. A decade earlier, by contrast, the Fed’s share of the debt was just under 11%. (Because the Fed is formally independent of the federal government, its stash isn’t included among the intragovernmental holdings discussed above.)

Servicing the debt is one of the federal government’s biggest expenses. Net interest payments on the debt are estimated to total $395.5 billion this fiscal year, or 6.8% of all federal outlays, according to the Office of Management and Budget . That’s more than $100 billion more than the government expects to spend on veterans’ benefits and services and more than it will spend on elementary and secondary education, disaster relief, agriculture, science and space programs, foreign aid, and natural resources and environmental protection combined .

Debt service as a share of federal outlays peaked at more than 15%  in the mid-1990s, but generally falling interest rates have helped hold down payments even as the dollar amount continues to grow. In fiscal 2021, the average interest rate on federal debt was a record-low 1.605%. But with the Fed raising its policy rate to try to cool off the economy, the U.S. has started paying more to borrow: The average interest rate on federal debt last year ticked up to 2.07%.

Note: This is an update to a post originally published on Oct. 9, 2013.

• Economic Conditions
• Economic Policy
• Government Spending & the Deficit
• Political Issues
• Social Security & Medicare

Drew DeSilver is a senior writer at Pew Research Center .

A look at small businesses in the U.S.

State of the union 2024: where americans stand on the economy, immigration and other key issues, americans’ top policy priority for 2024: strengthening the economy, americans more upbeat on the economy; biden’s job rating remains very low, online shopping has grown rapidly in u.s., but most sales are still in stores, most popular.

1615 L St. NW, Suite 800 Washington, DC 20036 USA (+1) 202-419-4300 | Main (+1) 202-857-8562 | Fax (+1) 202-419-4372 |  Media Inquiries

Research Topics

• Age & Generations
• Coronavirus (COVID-19)
• Economy & Work
• Family & Relationships
• Gender & LGBTQ
• Immigration & Migration
• International Affairs
• Internet & Technology
• Methodological Research
• News Habits & Media
• Non-U.S. Governments
• Other Topics
• Politics & Policy
• Race & Ethnicity
• Email Newsletters

ABOUT PEW RESEARCH CENTER  Pew Research Center is a nonpartisan fact tank that informs the public about the issues, attitudes and trends shaping the world. It conducts public opinion polling, demographic research, media content analysis and other empirical social science research. Pew Research Center does not take policy positions. It is a subsidiary of  The Pew Charitable Trusts .

Copyright 2024 Pew Research Center

United States National Debt and Macroeconomics Essay

Introduction, national debt within the context of macroeconomics, the uniqueness of the us national debt, implications of the national debt.

The national debt of the United States is one of the most known economic phenomena in the world. It is a regular topic in the elections agenda, it is a common cause of fear among economists, and it is also an extremely contradictory financial issue. The US national debt is both an alarming and stabilizing factor. It manages to be a source of threat and a sign of stability at the same time. Understanding what makes the national debt of the United States so controversial is essential in ascertaining its relation to macroeconomics.

Before delving into the specifics of the US financial policy, it is important to know how much influence the debt can exert on the economy. When economists talk about macroeconomics, they refer to the variety of factors influencing the performance of the entire economy (Mügge, 2016). It should be noted that the scope of this field is such broad that it does not incorporate economic issues exclusively. Decision-making on the governmental level is done based on a combination of factors. Naturally, some of them include macroeconomic indicators, such as gross domestic product, unemployment rate, inflation, and other statistical data concerning the state of the economy.

However, there are also a plethora of other spheres, which are not economic but nonetheless important. Political affairs, social issues, international relations are all considered when the authorities decide their next steps. They become especially relevant when decision-making concerns countries’ debts. The reason for this is that once the budget deficit is no longer viewed through the prism of numbers, it becomes a political issue. (Slater, 2018). Faced with the problem of the lack of resources, the government is forced to ask other states for loans. This decision temporarily solves the financial deficit, but it also backfires in a negative way.

The most vital form of power any country has is its sovereignty. As long as the government is free to make its own decisions without relying on other states or organizations, the nation remains independent. Yet, if a country becomes indebted to another state, its sovereignty is compromised. This is the real danger of using the national debt as a solution to the lack of money – the government no longer decides how it spends its resources on its own (Slater, 2018). Any indebted country also gives its loaners leverage points in negotiations. Therefore, national debt seizes to be a purely economic phenomenon and begins to influence macroeconomics politically.

Overall, it is expected that a country with debts has severe problems with its sovereignty and authority in the international arena. Yet, this is not the case with the United States. America has an unprecedented level of national debt – over 27 billion dollars (US debt clock, n.d.). At the same time, it is the leading nation of the Group of Seven, Group of Twenty, Organization for Economic Cooperation and Development, and the world’s largest economy by nominal GDP (The World Bank, n.d.). This raises the question of how a single entity can have the world’s biggest debt and be a hegemon simultaneously.

First, the problem of the US national debt is not new. The United States has had a budget deficit since Ronald Reagan’s presidency, which makes more than forty years (Furman & Summers, 2019). Within this time frame, generations have grown in a country that lives in constant debt. Furthermore, not only did the debt not subside, but it has also been growing exponentially. Yet, the US continues to spend extraordinary resources on all spheres of life, ranging from military defense to social policies. The subsequent implication is that the national debt does not necessarily incapacitate the government.

In order to understand how the United States manages to continuously increase its debt without any apparent repercussions, it is necessary to realize how money is created. Every country has a superior institution responsible for the printing of its national currency – a central bank. In the case of the US, this role is executed by the Federal Reserve. Money is the financial equivalent of goods and services (Focardi, 2018). The excessive number of commodities not backed by the sufficient amount of financial resources in the economy overvalues money. The reverse is also true – if there is too much of it, money is devalued, which leads to inflation.

In general, inflation manifests in the rise of prices, while population incomes remain the same. However, in the case of the US, this is not such an urgent problem (Furman & Summers, 2019). Inflation is controlled, while it should have skyrocketed long ago, like in Spain, Greece, and other economies with substantial national debts (Conerly, 2020). There conventional solution to inflation is cutting expenses and raising taxes. This is a dangerous policy because the population will immediately feel the consequences of the budget deficit and may start rioting. It is also not the decision the US Government chooses because its citizens are too attached to complex social programs such as Medicaid and Medicare.

The US response is different – it uses the position of the dollar as the world’s reserve currency. First, many countries are poorer than the United States, which makes their currencies cheaper compared to dollar. A special quality that the US dollar has is that it is a trustworthy investment – those who loan money to the US will always receive interest. However, these countries are not actually buying dollars – they are purchasing the American promise to pay back the debt (Furman & Summers, 2019). These financial obligations are called US bonds, which are issued by the US Department of Treasuries.

In essence, America loans money into existence because it does not exist on paper but in the form of interest and debt. This way, the Federal Reserve creates new money and deposits them in the American banks. However, the US has to export dollars to prevent inflation (Furman & Summers, 2019). One way of ensuring this is moving the production from the Unites States territory to poorer countries. Another method is lending financial assistance to governments which have suffered from war, poverty, or social strife. As a result, the US dollar bubble will continue to increase as long as the dollar remains in demand and is exported out of the US.

Altogether, it should be evident that common macroeconomic rules do not always apply to the United States. It has the largest national debt in the world, yet the economy continues to grow, and the government expenditures increase. The reason for the apparent American invulnerability lies in the dollar, which is created by the continuous cycle of loans. The American currency is exported into other economies, which prevents inflation in the United States. The growing bubble may constitute a future threat, yet it has provided the US with growth for over forty years. Overall, the demand for the dollar explains the growth of the United States national debt and its unique macroeconomics.

Conerly, B. (2020). Federal debt a danger to business, but not this year . Forbes. Web.

Focardi, M. F. (2018). Money: What it is, how it’s created, who gets it, and why it matters . Routledge.

Furman, J., & Summers, L. H. (2019). Who’s afraid of budget deficits: How Washington should end its debt obsession. Foreign Affairs , 98 , 82.

Mügge, D. (2016). Studying macroeconomic indicators as powerful ideas. Journal of European Public Policy , 23 (3), 410-427. Web.

Slater, M. (2018). The national debt: A short history . Oxford University Press.

US debt clock . (n.d.). Web.

The World Bank (n.d.). GDP (current US$) . Web.

• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2022, October 2). United States National Debt and Macroeconomics. https://ivypanda.com/essays/united-states-national-debt-and-macroeconomics/

"United States National Debt and Macroeconomics." IvyPanda , 2 Oct. 2022, ivypanda.com/essays/united-states-national-debt-and-macroeconomics/.

IvyPanda . (2022) 'United States National Debt and Macroeconomics'. 2 October.

IvyPanda . 2022. "United States National Debt and Macroeconomics." October 2, 2022. https://ivypanda.com/essays/united-states-national-debt-and-macroeconomics/.

1. IvyPanda . "United States National Debt and Macroeconomics." October 2, 2022. https://ivypanda.com/essays/united-states-national-debt-and-macroeconomics/.

Bibliography

IvyPanda . "United States National Debt and Macroeconomics." October 2, 2022. https://ivypanda.com/essays/united-states-national-debt-and-macroeconomics/.

• East Asian Economy Analysis: Thailand’s Real Estate Bubble
• Physics: Sliding Bubble Dynamics
• Macroeconomic Issues Related to the Federal Deficit and the National Debt
• Income and Substitution Effects for a Normal Good
• Macroeconomic Variables Overview
• American Business Environment and Economic Recession
• Ireland's and European Union's Strategic Analysis
• Non-Renewable Energy and Gross Domestic Product of China

Tuesday, May 18, 2010

Pros and cons of government debt.

• Global Debt Crisis

No comments:

Post a Comment

• Search Search Please fill out this field.
• Government Spending & Debt
• Government Debt

5 Ways Governments Reduce National Debt

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

While reducing debt and stimulating the economy are common goals of most governments in developed economies, achieving those objectives often involves tactics that appear to be mutually exclusive and sometimes contradictory. Given the myriad of fiscal and monetary policies , individuals and economists commonly debate strategies to reduce the national debt.

Key Takeaways

• Tax hikes alone are rarely enough to stimulate the economy and pay down debt.
• Governments often issue debt in the form of bonds to raise money.
• Spending cuts and tax hikes combined have helped lower the deficit.
• Bailouts and debt defaults have disadvantages but can help a government solve a debt problem.

Ways That Governments Reduce Federal Debt

Using debt to pay debt.

Governments issue bonds to borrow money to avoid raising taxes. This helps pay expenditures and stimulate the economy through public spending. The government must pay interest to its creditors with debt issues.

Theoretically, spending can generate additional tax income from businesses and taxpayers , which can be used to pay down debt. Issuing debt may provide a boost to economic growth but may not be effective in reducing long-term government debt directly.

$33 Trillion

The U.S. national debt in September 2023.

Buying Back Bonds

When the economy struggles, as during periods of high unemployment, governments seek to stimulate the economy by buying bonds they have issued. The U.S. Federal Reserve implemented quantitative easing , buying government bonds and other financial securities to spur economic growth and aid recovery from the financial crisis of 2007-2008. Many financial experts favor a quantitative-easing tactic in the short term. However, buying debt has not proved more effective than borrowing one's way to prosperity by issuing bonds.

2. Interest Rates

Maintaining interest rates at low levels can help stimulate the economy, generate tax revenue, and, ultimately, reduce the national debt . Lower interest rates make it easier for individuals and businesses to borrow money for goods and services, which creates jobs and increases tax revenues. Low interest rates have been used as a strategy of the United States, the European Union (EU) , the United Kingdom, and other nations during times of economic stress.

3. Spending Cuts

From 1921 to 1974, the President led the government budgeting process. In 1974, President Nixon signed the Budget and Impoundment Control Act of 1974 so that Congress could reclaim power over spending. Each year, the Congressional Budget Office (CBO) publishes the long-term projections of the federal budget and the future economy based on a current snapshot.

Citizens often waver in opinions about the need to balance the budget or cut government spending. These cuts often culminate in reductions in benefits to low-income families, veterans programs, and environmental protection programs.

4. Raising Taxes

Governments can raise taxes to pay for expenditures and to pay down their debt. Taxes can include federal, state, and in some cases, local income and business tax. Other tax examples include the alternative minimum tax , "sin" taxes on alcohol and tobacco products, corporate tax, estate tax, Federal Insurance Contributions Act (FICA) , and property taxes.

Although tax hikes are common practice, most nations face sizable and growing debts. When cash flows increase but spending continues to rise, increased revenues have little impact on a nation's overall debt level.

5. Bailout or Default

Many nations in Africa have been the beneficiaries of debt forgiveness. In the late 1980s, Ghana's debt burden was significantly reduced by debt forgiveness. To avoid default in 2010, Greece was given the equivalent of $146 billion in bailout funds by the International Monetary Fund and the European Union.

Default can include bankruptcy and/or restructuring payments to creditors, which is a common and often successful strategy for debt reduction.

Why Has the U.S. National Debt Grown?

While the U.S. national debt can increase and wane, economic strains such as the COVID-19 pandemic, the wars in Iraq and Afghanistan, and the Great Recession of 2008 have been contributors.

Who Owns the U.S. National Debt?

Public debt creditors include individual investors, institutions, and various foreign governments.

How Much Would Taxpayers Need To Provide To Pay Off U.S. Debt?

As of Sept. 21, 2023, the amount attributable to each U.S. taxpayer is $98,460.

The Bottom Line

Governments use various strategies to reduce their national debts. From issuing debt in the form of bonds to lowering interest rates, such actions may have short-lived success but always encounter debate.

U.S. Treasury. " Debt to the Penny ."

Federal Reserve Bank of St. Louis. " What is Quantitative Easing, and How Has It Been Used? "

Federal Reserve Board. " Speech: Monetary Policy since the Onset of the Crisis ."

Federal Reserve Bank of St. Louis. " Does Quantitative Easing Work as Advertised? "

The Brookings Institute. " Why Is Federal Spending So Hard to Cut ?"

Congressional Budget Office. " The 2023 Long-Term Outlook ."

Center for American Progress. " Budget Caps Are Budget Cuts ."

Social Security Administration (SSA). " What is FICA? "

United Nations: Africa Renewal. " Industrial Countries Write off Africa's Debt ."

Council on Foreign Relations. " Timeline: Greece's Debt Crisis ."

FiscalData.Treasury.gov. " What Is the National Debt? "

U.S. Debt Clock. " U.S. Debt Clock ."

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices

• Share full article

Advertisement

Supported by

student opinion

Should We Cancel Student Debt?

Americans owe $1.7 trillion in student debt. What should President Biden do about it?

By Callie Holtermann

Students in U.S. high schools can get free digital access to The New York Times until Sept. 1, 2021.

President Biden’s call to forgive $10,000 in student debt per borrower has reinvigorated a debate over the $1.7 trillion that Americans owe for student loans.

Do you believe that canceling some or all student debt is a matter of economic and racial justice? Or would it be unfair to those who have already paid off their loans, not to mention those who did not attend college at all?

In “ Should Biden Cancel Student Debt? ,” Spencer Bokat-Lindell examines arguments for and against canceling student debt:

Whenever I think about student loan debt, one of the first things I think about — besides my own — is a 2018 essay by my colleague M.H. Miller . As one of the 45 million Americans who collectively owe $1.71 trillion for student loans, Mr. Miller wrote about what it is like to have debt — more than $100,000 worth in his case — become the organizing principle of your life, to be incapacitated by it, suspended, at age 30, “in a state of perpetual childishness.” A lot has changed since Mr. Miller wrote that essay. For one thing, the national student debt increased by a couple of hundred billion dollars. But the most striking difference is how quickly calls for the president to cancel that debt, a vast majority of which the federal government owns, have migrated from the margins to the center of the national policy debate, from a radical demand chanted by activists to a proposal championed by the top Democrat in the Senate.

Mr. Bokat-Lindell supplies two arguments for canceling student debt:

The economic injustice argument frames education as an investment that has increasingly become faulty or even fraudulent: Generations of Americans were told that a higher degree was the path to financial security and upward mobility. In recent decades, however, as administrative expenses ballooned and public education budgets were slashed , schools shifted their rising costs to students , causing tuition to skyrocket. Still, people held on to the promise that the investment would eventually break even — after all, the federal government was lending them the money to pay for it. … The enlightened society argument frames higher education as a public good, much as it’s treated in other wealthy countries and as K-12 education is already treated in the United States: It should be free or cheap for all, financed by taxes that can be raised on the rich, and no one should have to go into debt to get it.

Mr. Bokat-Lindell also raises two arguments against student debt cancellation:

Skeptics of all these plans argue that there are better ways for the government to spend its money. First, debt cancellation of any kind is arguably unfair to borrowers who have already paid off their loans, raising the question of whether they would be owed reparations. Second, mass cancellation “boosts the balance sheets of people who attended college while doing nothing for people who did not attend college, even though the latter is, on average, worse off in many respects,” as Mr. Bruenig writes . “If the government is going to sprinkle $1+ trillion of net worth onto household balance sheets, should it really do so in a way that leaves out those without college educations?”

In the Opinion essay “ What Canceling Student Debt Would Do for the Racial Wealth Gap ,” Naomi Zewde and Darrick Hamilton situate the debate about student debt cancellation within the history of discriminatory policies affecting Black Americans:

The 20th-century government programs that built and supported the white middle class were explicitly exclusionary , and that helped create a wealth gap in which the median white household has eight times the assets of the median Black family. Less wealth means that Black students, particularly Black women , take on more debt when they attempt to go to school. The problem is compounded by employment and wage discrimination. Black families earn just 80 percent of what white families with the same education level do, and Black women earn just 63 cents on every dollar paid to white men with the same degree. So Black people need to obtain more credentials to obtain incomes equal to white people’s, and additional education costs them more because of the extra debt and accruing interest that lead many to struggle with repayment . … But a full cancellation would provide the best outcome of all, and would protect young Black people who sought to use education as a tool for social mobility rather than punish them for pursuing the very credentials they need just to obtain the income of less-educated white people. Because Black graduates have more debt than their classmates, a full cancellation would even the playing field instead of leaving more Black graduates mired in the educational debt trap.

Students, read the first article , then tell us:

Should student loan debt be canceled? Do you support partial or full debt cancellation — or none at all? Why or why not?

Are you considering attending college? How has the possibility of taking on student debt influenced your decision-making, if at all?

Which of the arguments in favor of canceling student debt do you find most persuasive? Are you most swayed by the economic injustice argument, the enlightened society argument or the argument that student debt cancellation would begin to address the racial wealth gap? Why?

Which of the arguments against canceling student debt do you find most compelling? Is debt cancellation unfair to those who have paid off their loans? Do you think that it makes sense to make a major investment that leaves out those who do not attend college? Why?

Do you think that student debt cancellation is the right place to focus efforts on making higher education more affordable? Why or why not? What other reforms do you think would make a difference?

About Student Opinion

• Find all of our Student Opinion questions in this column . • Have an idea for a Student Opinion question? Tell us about it . • Learn more about how to use our free daily writing prompts for remote learning .

Students 13 and older in the United States and the United Kingdom, and 16 and older elsewhere, are invited to comment. All comments are moderated by the Learning Network staff, but please keep in mind that once your comment is accepted, it will be made public.

Callie Holtermann joined The Learning Network as a senior news assistant in 2020. More about Callie Holtermann

Essay on Debt: Top 12 Essays on Debt | Public Finance | Economics

Here is a compilation of essays on ‘Debt’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Debt’ especially written for school and college students.

Essay on Debt

Essay Contents:

• Essay on the Impact of Debt on Future Generations

Essay # 1. Introduction to Debt:

ADVERTISEMENTS:

If the current expenditure of the government exceeds its current tax revenue there is said to be a deficit m the budget. A budget deficit is the excess of government outlays over receipts taken in from taxes, fees and charges levied by government authorities. This is normally covered by market borrowing and, in extraordinary situations, by deficit financing (i.e., borrowing from the Central Bank against foreign exchange reserves or by selling Treasury Bills).

Market borrowing is an alternative to current taxation=as a means of financing government expenditure. Borrowing implies the sale of a security that bears the promise to pay interest on a given number of years and to return the principal on the date of maturity of the loan. No compulsion is involved in the sale of such securities, except in abnormal situations such as war or emergency. Instead, governments compete with other borrowers in the market for loanable funds.

The government pays interest usually at less than the market rate. It is because govern­ment bond is free from the risk of default. When the government borrows money from the market it is said to be in debt. Such debt is known as public debt. It is owed to the public, that is, held outside the government itself.

In India, public debt is a part of the total borrowings by the Union Government which include such items as market loans, special bearer bonds, treas­ury bills and special loans and securities issued by the RBI. It also includes the outstanding external debt.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Essay # 2. Types of Debt :

The portion of a government’s indebtedness owed to its own firms and citizens is an internal debt. Repayment of internal debt represents a redistribution of purchasing power from certain group of citizens who pay taxes and the citizens who in the past have been creditors of the Central Government. When a central government borrows mainly from its citizens, the opportunity cost is foregone consumption and investment in the domestic economy rather than from foreign sources.

When a country prolusions from another country, or function the rest of the world, it is in external debt. When external debt is repaid, resources necessarily flow out of the nation, with a consequent loss in productive opportunities.

The external debt varies with interest rates in India relative to these that can be earned on funds abroad and India’s BOP position. The total volume of the gross Central Government debt at any point of time, reflects the past and current debts and accumulated interest burden on the securities issued to cover those deficits.

Repayment of external debt implies outflow of foreign exchange or export of goods to foreign nations. This reduces society’s consumption possibilities and involves loss of social welfare. Moreover, if the volume of external debt as also the proportion of external debt in total debt increases and if taxes are raised to pay foreigners for past loans of the Central Govern­ment, a country’s future growth rate may slow down.

A large volume of external debt implies huge outflows of funds and real losses in productive opportunities rather than mere redistributive effects. However, the bulk of most countries’ debt is internal.

So its repayment does not involve export of economic resources to foreign nations. Interest paid on such debt is not a burden on society because any refunding or payment of interest on the debt at maturity involves merely a redistribution of purchasing power among citizens.

Essay # 3. Economic Effects of Deficit and Borrowers :

Deficits can affect both resource allocation (by influencing the types of government spending) and the overall size of the government sector of the economy. They can also influence prices and interest rates, thereby affecting the distribution of income.

The borrowing method of covering a budget deficit enables the government to keep taxes lower than they otherwise would be. But the people of the country can still enjoy a given quantity and mix of government services. However, borrowing also can allow higher govern­ment-spending—either for transfers or for purchases of goods and services without raising taxes.

Because borrowing to finance deficits postpones the burden of taxation to the future, it makes sense to use borrowing to finance government investments that will provide a flow of future benefits. This promotes efficiency because taxes will then be distributed among future generations who will share the benefits of such government investments as roads, structures, transportation and communication networks and environmental protection.

Borrowing to finance a road, school or industrial project that will be used for many years may be quite appropriate. But borrowing to pay for projects that are never completed (or per­haps are never even started), or borrowing to finance this year’s government salaries, poses real problems.

Many governments have taken on more debt than they could comfortably pay-off, forcing them to raise taxes sharply and reduce living standards. Others have simply failed to repay, jeopardizing their ability to borrow in the future.

Financing government expenditures by borrowing rather than by raising taxes results in higher level of consumption in the short-run (since the disposable income is higher). When the economy is at full employment, higher consumption implies that there is less room for invest­ment. To maintain the economy at full employment without inflation, the Central Bank has to increase interest rates. Debt financing leads to lower investment and thus, in the long-run, to lower output and consumption.

As Richard Musgrave has put it:

“The danger inherent in continuing high deficits lies not so much in their effect on the magnitude of debt as in their current impact on the fiscal-monetary mix and economy’s on the rate of saving and hence, growth.”

By borrowing, the government places the burden of reduced consumption on future genera­tions. It does this in two ways. Future output is lowered as a result of lower investment. Moreo­ver, some of the burden of current expenditures is put on to future generations. When the government imposes taxes in future repay the debt, the future generation suffers and the current genera­tion escapes the tax burden.

Essay # 4. The Effect of the Deficit on Credit Mar­kets :

The effect of borrowing on the economy also depends on how it affects interest rates, national savings and investments. The influence of borrowing on these economic variables depends on how the budget deficit, which requires borrowing, influences the demand and supply of loanable funds in credit markets.

In essence, a budget deficit adds to the national debt and thus increases the future interest costs to the Central Government. Therefore, each year more and more tax revenues must be devoted to paying interest on the national debt instead of providing goods and services to citizens.

Other things being equal, borrowing contributes to higher interest rates. By doing so, borrow­ing can choke off private investment, thereby slowing the real rate of growth for the nation. Fig. 1 shows that an increase in demand for loanable funds by the government to finance a deficit can increase market interest rates.

The market demand for loanable funds is composed of the demand for credit by households, business firms, and governments at different levels— central, state and local. When the central government increases the demand for funds it can push up the rates of interest because it borrows a large amount of the total available funds per year. The initial equilib­rium is at E where the interest rate is i i , and the total quantity of funds borrowed is L 1 L 2

Fig. 1 shows that an increase in government demand for funds shifts the market demand curve from D 1 to D 1 + ∆D G and results in a new market equilibrium at F. The market rate of interest increases to i 2 and the quantity of loanable funds supplied increases to L 2 .

The rise in the market rate of interest decreases the quantity of loanable funds demanded by business firms for investment. It also chokes off borrowing by households to acquire such durable goods as automobiles and homes. At the same time, the higher interest rates encourage more saving, thereby decreasing private consumption in the current year.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Essay # 5. Capital Displacement (or Crowding-Out Effect) :

Debt finance can have adverse effect on capital formation. When the government initiates a project, whether financed by taxes or borrowing, resources are removed from the private sector. It is usually assumed that when tax finance is used, most of the resources removed come at the expense of consumption.

On the other hand, when the government borrows, it competes for funds with individuals and firms who want the money for their own investment projects. Hence it is generally assumed that debt has most of its effect upon private investment.

Therefore, debt finance will leave the future generation with a small capital stock, ceteris paribus. Its members will, therefore, be less productive and have smaller real incomes than otherwise would have been the case.

The assumption that private investment is reduced when the public draws on the pool of resources available for investment, private investment is crowded out. Crowding out is induced by charger in the interest rate.

When the government increases its demand for credit, the inter­est rate, which is just the price of credit, must go up. But if the interest rate goes up, private investment becomes more expensive and less of it is undertaken. Thus large public debt is bound to cause some reduction in society’s capital stock.

ADVERTISEMENTS: (adsbygoogle = window.adsbygoogle || []).push({}); Essay # 6. Views of Economists on Debt:

Musgrave’s View :

However, in Musgrave’s view, taxes raised to service internal debt (i.e. to pay interest along with the principle) imposes a burden on the economy. Taxes, which must be imposed to finance the transfer of funds from one pocket to another, carries a dead weight loss, just as the other taxes do and this places a burden on the economy. This problem may arise even though interest payments are included in taxable income.

The tax-rate ‘t’ requires to finance interest is given by:

The increase on the supply of loanable fund re­sults in a new equilibrium at point G. At that point, an additional. ∆ L rupees of loanable funds are made avail­able per year to finance private investment. The equilib­rium amount of loanable funds is now L 3 rupees per year. If these extra funds exactly equal the amount of funds required to finance the deficit, the interest rate under the equilibrium is i 1 the initial level.

Thus government borrowing to cover deficits does not increase the market rate of interest. It causes no crowding out of private investment or of consumer borrowing for durable goods. Government budgetary deficit and the consequent borrowing do not really matter. This means that changes in the deficit will not affect aggregate demand, because changes in government borrowing will be offset by changes in private saving.

Increased private saving caused by government deficits can lead to increased bequests, or intergenerational transfers, between citizens who are living now and their heirs. The increased saving by those who currently pay taxes that results from debt induced saving allows them to increase their own voluntary private bequests to their children beyond the amounts that would be possible if tax finance were used.

These bequests help the future generation to pay the higher taxes that will be necessary to cover the interest payments on the debt in the future. Similarly, the reduced tax burden on the current generation made possible by debt finance implies that these taxpayers in their old age will need transfers from their children. The compensating intergenerational transfer therefore decreases the burden of the debt on the future generation.

Essay # 8. Public Debt, National Saving and Economic Growth :

A nation’s rate of economic growth, the expansion of its capacity to produce goods and services, is largely a matter of investment. Investment is linked to saving and saving requires a sacrifice of current consumption so that the resources used to produce consumer goods for today can be reallocated to the production of capital goods.

When a nation saves more, it can allocate more resources to the development of new technology, the production of new machinery and to invest­ment in human capital. The more a nation saves today, the greater will be its future rate of growth of output. Conversely, the less it saves, the smaller will be its future potential to grow.

National saving is the sum of personal saving by households, business saving, and saving by the government sector. The government sector contributes to an increase in national saving when it spends less than it takes in.

In other words, in order for government to help increase national saving, it would have to run a budget surplus instead of a deficit. When the govern­ment runs a deficit, it spends more than it takes in and therefore must borrow instead of saving.

The net contribution of the government sector to national saving is the combined deficit or surplus of the governments at all levels – central, state and local. When the government runs a deficit, it contributes to a decline in national saving. In effect, a government deficit amounts to negative saving that absorbs loanable funds rather than making them available for investment.

Essay # 9. The Incidence of Borrowing :

If government borrowing bids up interest rates and contributes to both a reduction in national saving and investment, then borrowing leads to a fall in the rate of saving and a slowdown in the rate of economic growth. This, in its turn, implies that the rate of growth of income will be slower in the future so that future taxpayers (younger people) will have lower future incomes than otherwise would be possible. Unfortunately, these young people also will be subject to higher taxes and greater portions of their tax payments will be used to finance interest costs of growing internal debt.

Thus, internal debt is likely to redistribute the burden of financing gov­ernment expenditure from the current generation to future generations of taxpayers. If, on aver­age, these taxpayers have lower income than that of the current generation partly because of the undesirable effects of taxes on economic growth, then this incidence could be regressive.

However, to assess the full incidence of debt finance we have to look at the hypothesis of Ricardian equivalence. If the current generation of taxpayers realizes that deficit finance implies higher taxes for themselves and their descendants, they could increase their current saving.

This increase in saving increases the supply of loanable funds in credit markets and could offset both the negative saving of the debt itself and any possible crowding out of private investment. In short, debt neutrality implies absence of intergenerational wealth effect.

It is also possible that more government spending is allocated to investment in infrastruc­ture and other spending that will yield a stream of benefits to future generations. Under these circumstances, even if private investment is crowded out due to higher interest rates, future economic growth rates need not decline as long as the government investment is at least as productive as the private investment that it displaces.

Public debt can also contribute to increased government purchases that keep the economy from having severe recessions and help keep it on a steady path of economic growth near its potential. If this is the cse, the deficit can actually increase private investment by contributing to economic stability. A stable economy with few severe downturns not only encourages investment by domestic producers but also can encourage inflow of foreign saving and investment.

Essay # 10. Does an Internal (Public) Debt Impose a Burden on Society?

Many economists held the view that no burden exists in case of an internal debt because it is held by a country’s own citizens rather than by foreigners. Since we owe the debt to ourselves, payment of interest and principal of the debt merely transfers income from taxpayers to bondholders.

The burden of an internal debt is the redistribution effect of bond financing of government expenditure. Future generations either retire the debt, or else refinance it. In either case, there is a transfer from future taxpayers to bondholders. It would appear that future generations must bear the burden of the debt.

According to A. P. Lerner, an internal debt creates no burden for the future generation. Mem­bers of the future generation simply owe it to each other. When the debt is paid off, there is a transfer of income from one group of citizens (who do not hold bonds) to another (bondholders).

However, the future generation as a whole is not worse off in the sense that its consumption level is the same as it would have been otherwise. As Melon has put it: “the right hand owes to the left.”

The story is quite different when a country borrows from abroad to finance current debt. This is referred to as an external debt. Let us suppose the money borrowed from overseas is used to finance current consumption. In this case, the future generation certainly bears a burden because its consumption level is reduced by an amount equal to the loan plus the accrued interest which must be sent to the foreign lender.

If, on the other hand, the loan is used to finance capital accumulation the outcome depends upon the project’s productivity. If the mar­ginal return on the investment is greater than the marginal cost of funds obtained abroad, then the combination of debt and capital expenditure actually make the future generation better off. To the extent that the project’s return is less than the marginal cost, the future generation is worse off.

Essay # 11. Borrowing Vs. Taxation:

In this context we may make comparison between tax financing and bond financing. When a gov­ernment raises funds to finance public expenditure by selling bonds, no compulsion is involved, unlike tax financing. Instead, the bonds (securities) issued by government authorities are purchased voluntarily by individuals and financial institutions (mainly banks and investment companies).

The individuals who purchase such securities surrender present consumption opportunities for future consumption opportunities, or they substitute public debt for private securities in their portfolio. They make this voluntary sacrifice because the return they expect to receive on their foregone consumption exceeds their estimated cost of a sacrificing current consumption opportunities. At the same, time borrowing makes it unnecessary to increase current taxes, thereby avoiding the need to force citizens to curtail current consumption and saving.

Under borrowing, private market is ‘choked off only to the extent to which increased government borrowing causes, by increasing the demand for credit, the general level of interest rates to rise. Thus, compared to tax financing, borrowing increases the consumption opportunities of the current generation over its lifetime than could be enjoyed if taxes were used.

To pay interest on the debt and return the principal, the government usually increases taxes. If so, other things being equal, taxpayers in the future undergo reductions in consumption or saving. The increased tax revenues necessary to pay interest on the debt redistribute income from the taxpayers to the holders of government bonds.

Since the bulk of the public debt in India is issued to Indian citizens, its retirement would not represent a drain of resources from the country. There­fore, the effect of such retirement would be to redistribute income among citizens.

Essay # 12. Impact of Debt on Future Generations :

Some economists argue that the burden of debt cannot be transferred to future generations but must be borne by the present generation, because resources are withdrawn from the private sector at the time the government makes the loan. This definition of burden implies that bor­rowing merely involves foregone private consumption in the current period.

It neglects the fact that this sacrifice of consumption is completely voluntary on the part of the private economic units and is compensated by greater opportunities for future consumption as a result of interest payments on the government securities.

If we assume that the future generation must be taxed to pay the interest burden on the debt, then it must undergo a real reduction of income, with no compensation in the form of increased future consumption. In this sense, the burden of the debt falls on future generation; it bears the brunt of compulsory taxes.

The burden of the debt, therefore, is a reduction in welfare for future taxpayers who do not hold or inherit government securities that are paid-off in the future. Future generations will pay more in taxes to enable the government to service the debt instead of receiving public goods and services in return for those taxes.

Future generations also will have to tolerate a fall in their living standards as a result of the debt if past debts cause interest rates to rise and reduce private investment. A reduction in private investment implies slower growth of the nation’s capital stock than could be experienced in the absence of public debt.

The effect will be slower growth of the economy. A shortage of capital will reduce the productivity of workers in the private sector. This will lower their wages and incomes. This implies a growing national debt as measured by the deficit-income ratio. If deficit continues to increase but national income fails to increase at the same rate the burden of debt will rise and this will lead to a fall in future living standards.

If resources are fully employed, an increase in public services shifts the resources from private to public sector, leaving for the pro­duction of public goods. In this case the burden must be borne by the present generation. But it is not necessarily so if the transfer of burden is viewed in terms of its current consumption.

Reduced capital formation is the primary mechanism through which the burden is transferred. Let us assume, in terms of the framework of classical system, that investment adjusts itself automatically to the level of saving at a full-employment level of income. In such a situation, any transfer of resources from private to public use leaves the private sector with fewer resources. In this sense, the burden of today’s public expenditures has to be borne by the present generation.

But the resource withdrawal from the private sector may be from consumption or capital formation. In the first case the welfare of the present generation, as measured by its consumption, is reduced and the income of the future generation is unaffected. In the second case, the welfare of the present generation, in terms of its consumption level, remains unchanged while the future generation will inherit a smaller capital stock and thus, suffer a loss of potential income.

It is in this sense that the future generation is burdened. If we further assume that tax finance comes out of consumption while loan finance originates from saving (hence, under the assumption of a classical system, few resources out of investment) it then follows that- loan finance burdens future generations.

This burden, however, can be offset if increased saving by the current generation of taxpayers results from the use of debt financing. This, in its turn, will result in increased bequests to future taxpayers that offset the burden of the debt (the Ricardian equivalence).

Given this Ricardian equivalence it can no longer be argued than loan finance serves to secure burden transfer whereas tax finance does not, but this is hardly a realistic assumption.

If we accept the principle that public services should be financed on a benefit basis, the nature of the expenditure to be financed becomes crucially important. In the case of capital expenditure, the benefits will extend into the future, in which case transfer of burden is neces­sary to ensure intergenerational equity. This is the rationale for dividing the budget to current and capital components; while the former is tax financed, the latter is loan financed.

The burden of the debt can also offset if the resources raised by issuing government bonds is used to finance projects that yield future benefits. The benefit principle of taxation suggests that it is efficient to transfer the burden of present expenditures to future generations if certain types of expenditure are expected to benefit them. For example, it is reasonable to postpone until the future the burden of taxes for financing war, because the benefits of a successfully completed (that is, won) war will accrue to those living in the country in the future.

The benefit received principle suggests that the beneficiaries of a particular government spending programme should have to pay for it. Thus, to the extent that the programme creates for future generations, it is appropriate to shift the burden to future generations via loan finance.

The choice between tax and debt finance is just a choice between the timing of taxes and tax finance, due large payment is made at the time the expenditure is undertaken with debt finance, many small payments are made over time to finance the interest due on the debt. The present values of tax collections must be the same in both cases.

The implication is that debt finance, which results in a series of relatively small tax rates, is superior to tax finance on efficiency grounds. The ‘crowding out’ effect which is so important in the context of the intea-generational burden of the debt, is also central to the efficiency issue.

According to intergenerational alterism model, there is no crowding out. Thus only labour supply choices can be distorted and debt finance is unambiguously superior on efficiency grounds. However, to the extend that crowding out is important, tax finance becomes more attractive.

As far as economic justice (fairness) is concerned, the State has an important role to pay in protecting the vulnerable and ensuing an equitable distribution of income between people, between groups in society, between regions and across generations. There is not only a moral case for the state to help those in absolute poverty but also a strong political and economic one.

The weak, poor, vulnerable and depressed people can be a major cause of civil unrest and political instability. This deters investment and growth. It is also important for the state to keep an eye on the welfare of future generations, which may require altering the balance between consumption and investment in the present.

The government can intervene in various ways to discourage present consumption and raise the level of intervention for higher future consump­tion, e.g., taxation, subsidized interest rates and public investment on society’s behalf.

Conclusion :

In the ultimate analysis it seems that the choice between tax and debt finance (borrowing) is a moral one. Morality requires self-restraint: deficits are indicative of a lack of restraint; there­fore, deficits are immoral. This normative view seems to rest heavily on the unproven positive hypothesis that the burden of the debt is shifted to future generations.

A perhaps more compelling non-economic argument against borrowing is a political one. Some have pointed out a tendency for the political process to underestimate the costs of gov­ernment spending and to overestimate the benefits. The discipline of a balanced budget may produce a more careful weighing of benefits and costs, thus preventing the public sector from growing beyond its optimal size.

Related Articles:

• Internal Debt and External Debt | Public Finance
• Burden of Public Debt and Its Measurement
• Internally-Held Public Debt and Burden to Future Generation
• Public Finance and Private Finance: Similarities and Dissimilarities

• Skip to main content
• Keyboard shortcuts for audio player

Is it fair to forgive student loans? Examining 3 of the arguments of a heated debate

Scott Horsley

Student loan borrowers stage a rally in front of The White House on Aug. 25 to celebrate President Biden cancelling student debt. The plan has sparked heated debate, including about its economic fairness. Paul Morigi/Getty Images for We the 45m hide caption

Student loan borrowers stage a rally in front of The White House on Aug. 25 to celebrate President Biden cancelling student debt. The plan has sparked heated debate, including about its economic fairness.

President Biden's plan to forgive hundreds of billions of dollars in student debt is sparking heated debate.

Biden last week announced plans to forgive up to $20,000 in federal student loan debt for Pell Grant recipients and up to $10,000 for others who qualify.

The news will provide relief for borrowers at a time when the cost of higher education has surged.

Student loan forgiveness is politically popular. But not all Democrats are on board

But critics are questioning the fairness of the plan and warn about the potential impact on inflation should the students with the forgiven loans increase their spending.

Here are three key arguments – for and against the wisdom of Biden's decision.

Raising living standards or adding fuel to inflation?

Undoubtedly, student debt is a big burden for a lot of people.

Under Biden's plan, 43 million people stand to have their loan payments reduced, while 20 million would have their debt forgiven altogether.

People whose payments are cut or eliminated should have more money to spend elsewhere – maybe to buy a car, put a down payment on a house or even put money aside for their own kids' college savings plan. So the debt forgiveness has the potential to raise the living standard for tens of millions of people.

Critics, however, say that additional spending power would just pour more gasoline on the inflationary fire in an economy where businesses are already struggling to keep up with consumer demand.

Inflation remains near its highest rate in 40 years and the Federal Reserve is moving to aggressively raise interest rates in hopes of bringing prices back under control.

Not all economists believe the debt forgiveness will do much to fuel inflation.

Debt forgiveness is not like the $1200 relief checks the government sent out last year, which some experts say added to inflationary pressure. Borrowers won't suddenly have $20,000 deposited in their bank accounts. Instead, they'll be relieved of making loan payments over many years.

President Biden announces student loan relief in the Roosevelt Room of the White House in Washington, D.C. on Aug. 24. Olivier Douliery/AFP via Getty Images hide caption

President Biden announces student loan relief in the Roosevelt Room of the White House in Washington, D.C. on Aug. 24.

Because the relief is dribbled out slowly, Ali Bustamante, who's with left-leaning Roosevelt Institute says Biden's move won't move the needle on inflation very much.

"It's just really a drop in the bucket when it come to just the massive level of consumer spending in our very service- and consumer-driven economy," he says.

The White House also notes that borrowers who still have outstanding student debt will have to start making payments again next year. Those payments have been on hold throughout the pandemic.

Restarting them will take money out of borrower's pockets, offsetting some of the additional spending power that comes from loan forgiveness.

Helping lower income Americans or a sop to the rich?

Another big point of contention has to do with fairness.

Forgiving loans would would effectively transfer hundreds of billions of dollars in debt from individuals and families to the federal government, and ultimately, the taxpayers.

Some believe that transfer effectively penalizes people who scrimped and saved to pay for college, as well as the majority of Americans who don't go to college.

They might not mind subsidizing a newly minted social worker, making $25,000 a year. But they might bristle at underwriting debt relief for a business school graduate who's about to go to Wall Street and earn six figures.

Students from George Washington University wear their graduation gowns outside of the White House in Washington, D.C, on May 18. Economists worry President Biden's plan to forgive student loans could encourage more people to take on debt in the hopes of also being forgiven. Stefani Reynolds/AFP via Getty Images hide caption

Students from George Washington University wear their graduation gowns outside of the White House in Washington, D.C, on May 18. Economists worry President Biden's plan to forgive student loans could encourage more people to take on debt in the hopes of also being forgiven.

The White House estimates 90% of the debt relief would go to people making under $75,000 a year. Lower-income borrowers who qualified for Pell Grants in college are eligible for twice as much debt forgiveness as other borrowers.

But individuals making as much as $125,000 and couples making up to $250,000 are eligible for some debt forgiveness. Subsidizing college for those upper-income borrowers might rub people the wrong way.

"I still think a lot of this benefit is going to go to doctors, lawyers, MBAs, other graduates that have very high earnings potential and may even have very high earnings this year already," says Marc Goldwein senior policy director at the Committee for a Responsible Federal Budget.

Helping those in need or making college tuition worse?

Goldwein also complains that the loan forgiveness doesn't address the larger problem of soaring college tuition costs.

In fact, he suggests, it might make that problem worse — like a Band-Aid that masks a more serious infection underneath.

For years, the cost of college education has risen much faster than inflation, which is one reason student debt has exploded.

And now what? The question that follows Biden's student loan forgiveness plan

By forgiving some of that debt, the government will provide relief to current and former students.

But Goldwein says the government might encourage future students to take on even more debt, while doing little to instill cost discipline at schools.

"People are going to assume there's a likelihood that debt is canceled again and again," Goldwein says. "And if you assume there's a likelihood it's canceled, you're going to be more likely to take out more debt up front. That's going to give colleges more pricing power to raise tuition without pressure and to offer more low-value degrees."

The old rule in economics is when the government subsidizes something, you tend to get more of it. And that includes high tuition and college debt.

• college tuition
• student loan debt
• student loans
• student debt forgiveness

Live revision! Join us for our free exam revision livestreams Watch now →

Reference Library

Collections

• See what's new
• All Resources
• Student Resources
• Assessment Resources
• Teaching Resources
• CPD Courses
• Livestreams

Study notes, videos, interactive activities and more!

Economics news, insights and enrichment

Currated collections of free resources

Browse resources by topic

• All Economics Resources

Resource Selections

Currated lists of resources

• Topic Videos

Evaluating the effects of rising national debt

Last updated 6 May 2020

• Share on Facebook
• Share on Twitter
• Share by Email

In this video we explore some A* analysis and evaluation arguments connected to a question on the National Debt.

The question set is: "Assess the view that a high level of national debt can be damaging to an economy."

• Debt finance
• Government debt
• National Debt
• Sovereign debt
• Fiscal deficit

You might also like

Fiscal policy - government intervention.

Study Notes

The joy of the big revamped railway station

12th October 2015

What has happened to taxes over time?

5th March 2017

Micro and Macro Effects of Higher VAT (Edexcel 25 Mark Question)

Exam Support

Fiscal Austerity (Chain of Analysis)

Macroeconomic policy revision (online lesson).

Online Lessons

The fiscal multiplier of $2 trillion of stimulus spending

15th January 2021

2.6.2. Fiscal Policy - Taxation (Edexcel A-Level Economics Teaching PowerPoint)

Teaching PowerPoints

Our subjects

• › Criminology
• › Economics
• › Geography
• › Health & Social Care
• › Psychology
• › Sociology
• › Teaching & learning resources
• › Student revision workshops
• › Online student courses
• › CPD for teachers
• › Livestreams
• › Teaching jobs

Boston House, 214 High Street, Boston Spa, West Yorkshire, LS23 6AD Tel: 01937 848885

• › Contact us
• › Terms of use
• › Privacy & cookies

© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.

Analysis In its 2024 budget, the Victorian government forgets debt, dreams big and crosses its fingers

There's a clear and simple message you get from reading the Victorian government's budget papers : don't panic.

Sure, there's a few numbers that will widen your eyes.

Money the government gets in (revenue) for the next financial year is $96.1 billion, which is less than projected it will spend (expenses) of $98.3 billion.

And yes, debt is $156.2 billion rising to $187.8 billion by 2027-28 – which by that time will be 25 per cent of the value of all the goods and services produced in the state in a year (called gross state product or GSP).

And OK, that means a daily interest bill on the debt of about $15 million, climbing to more than $25 million a day by 2027.

But why worry? This is Victoria. Get with the program.

That program — if you buy into the government's vision — is a rapidly-growing population that will buy property, find employment and get around on mega-transport projects due to open just before the next state election.

There are schools, tunnels, hospitals and roads to service this swelling growth, as Melbourne (where the vast majority of Victorians live) becomes the nation's largest city, overtaking a waterside resort for squillionaires to the north that also houses normal people.

All that needs to happen is for employment to stay strong, inflation and construction costs to keep moderating, interest rates to go no higher, workers to find housing that is being built at a far slower rate than people are moving here and a few other "risk factors".

Fingers crossed, eh?

The problems

With the immense debt and still unfunded mega-projects like a circular underground railway (the Suburban Rail Loop) about to start digging, you would expect a state government 2.5-years from an election would raise money and cut costs — hard.

There's a bit of that, but not much. It's more Facebook Marketplace than selling a kidney.

The government is making extra cash by:

• Shifting commercial and industrial properties from a stamp duty (cost when sold) system to one that kicks in 10 years after the sale and is then annual.
• People dumping stuff at the tip will pay more, bringing it into line with fees for New South Wales and South Australia.
• Lifting the Fire Services Levy from where it started a decade ago to a higher level.

The savings are also pretty minimal. There's things like ending the Sick Pay Guarantee, a COVID-era pilot of paying sick leave to casuals. With a more "worker friendly" regime in power federally (the government's words) the pilot is over for now.

The Jacinta Allan-led government will also trim in costs by:

• Ending some COVID-era employment.
• Reducing office space as work-from-home and those reduced numbers impact the desks required. 
• Trimming in a program to expand state-funded pharmacy and care clinics.
• Making the money for Breakthrough Victoria, which funds speculative start-up tech businesses, stretch for 15-years rather than the original 10-years it was meant to.

It's not exactly ring all the alarms stuff is it? That's because they're not worried.

Get with the program and all cost is an investment. Public sector wages help pump private sector ones. Infrastructure unlocks value.

Remember the daily cost of that interest bill? Treasurer Tim Pallas calculates it as "1/4000th of one per cent of the economy" – an infinitesimal smidge of nothingness compared to the riches that await Victorians … if it all works out.

And there's a surprising group helping them get there.

Opposing forces

At the end of 2022 Victorians went to the polls.

After the painful repeated lockdowns in Melbourne — and with the exploding cost of keeping the state alive barely covered by a federal government accused of a lack of interest or care in the plight of the southern mainland state — there were a lot of predictions about the fate of the then eight-year-old government.

Plenty of interstate commentators had written Dan Andrews' political obituary, based on his bombastic personality, COVID-era decisions and ballooning debt.

But at the election the government didn't lose seats. It gained them.

By the time the next election rolls around Liberal-National opposition will have been in power for just four years between 1999 and 2026.

Some could say their show of unity, policy ideas and the cut-through they are making with the Victorian public show a resolute commitment to remaining in opposition.

What even is money?

Underpinning all of this are a few things that might not seem obvious.

One is the immense employment that's been delivered by infrastructure programs, public sector growth and things like "free TAFE".

Another is that the government has literally built credibility by starting and finishing big projects — new schools and hospitals, the removal of scores of level crossings — sprinkled in every corner of the state.

Adding to it is that COVID changed what people think about government, debt, and the role of the state in guiding the economy — we're seeing that federally too, as taxpayers invest billions in specific companies and industries.

If you think any government is going to leave the future to the invisible hand of the free market, you haven't been paying attention. That's gone.

A final element is that there's not a compelling competing vision about Victoria's growth and how it is being dealt with.

People can be unhappy about the untold millions spent on infrastructure, but when a new five-station underground rail line opens under the central business district next year, I don't expect a protest march out the front about the cost.

More likely is that people will use it, love it and ask a pressing question: When will there be one where I live?

• X (formerly Twitter)
• Interest Rates
• Public Transport
• State and Territory Government
• Warrnambool

Energy bill relief, rent assistance boost: Budget cost-of-living measures explained

Treasurer jim chalmers' federal budget included energy bill rebates, tax cuts and changes to paid parental leave in response to calls for cost of living relief..

Treasurer Jim Chalmers has defended the use of $300 energy rebates for all households in the federal budget, despite calls to means test the measure. Source: AAP / Lukas Coch

Rent assistance

Here are the winners and losers of the 2024 federal budget

Energy rebates.

Stage three tax cuts

Paid parental leave

Australians will get an 'effective pay rise': Here's how much to expect

Help debt help and paid placements for students.

The Australian budget is big. Let's break it down

Welfare payments

Cost of Living Secrets: Renting

Share this with family and friends

Recommended for you

Cost of Living

The $300 budget sweetener that could turn sour for Australians

Qantas' travel shake-up: China route dumped and new flights revealed

Aviation Industry

The $100 change coming to Australian passports

Labor MP breaks ranks with Anthony Albanese over Palestinian UN membership support

Federal Politics of Australia

Eurovision winner Nemo breaks trophy, thumb and says contest may need fixing too

Whistleblower David McBride sentenced to prison for nearly six years for leaking ADF files

Human Rights

Get SBS News daily and direct to your Inbox

Sign up now for the latest news from australia and around the world direct to your inbox..

Morning (Mon–Fri)

Afternoon (Mon–Fri)

By subscribing, you agree to SBS’s terms of service and privacy policy including receiving email updates from SBS.

SBS World News

• Azerbaijani
• Chinese (Simplified)
• Chinese (Traditional)
• Haitian Creole
• Kinyarwanda
• Kurdish (Kurmanji)
• Kurdish (Soranî)
• Odia (Oriya)
• Scots Gaelic

2024-25 State Budget

The 2024-25 Budget reflects Western Australia’s strong economy, rapidly growing population and record employment.

The State’s Budget continues to be in a strong position. A $3.2 billion operating surplus is expected in 2023-24 with a $2.6 billion surplus forecast for 2024-25.  These surpluses play a critical role in funding the Government’s record investment in infrastructure and keeping net debt affordable and substantially lower than all other States.

Key initiatives in the Budget include:  a record $762 million cost of living support package, including a $400 electricity credit for every household; $1.1 billion in new investment to boost housing supply and affordability; a record $3.2 billion investment in the State’s health system; $1.8 billion to diversify and decarbonise WA’s economy; and $1.3 billion to boost education and training.

The Budget Papers are available on the Our State Budget website .

WA State Budget

Provided by

Address: David Malcolm Justice Centre 28 Barrack Street PERTH WA 6000 Telephone: 61 8 6551 2777 Email: [email protected] Submit feedback to the Department of Treasury WA

• Facebook share (Opens in a new tab/window)
• Twitter (Opens in a new tab/window)
• LinkedIn (Opens in a new tab/window)

Acknowledgement of Country

The Government of Western Australia acknowledges the traditional custodians throughout Western Australia and their continuing connection to the land, waters and community. We pay our respects to all members of the Aboriginal communities and their cultures; and to Elders both past and present.

2024-25 State Budget

The 2024-25 State Budget was delivered on Tuesday 7 May 2024. The Budget papers are split into five sections and are supported by Budget Information Papers.

2024-25 Treasurer's Speech

2024-25 strategy and outlook, 2024-25 service delivery, 2024-25 state capital program, 2024-25 statement of finances, 2024-25 department performance statement, 2024-25 budget overview, 2024-25 gender equality budget statement, 2024-25 budget media releases.

Treasury borrows P17 billion from domestic market

At a glance.

The national government raised the planned borrowing amount for debt papers due to lower yields.

The interest rate for the 91-day debt papers decreased to 5.727 percent from the previous auction's 5.780 percent. The government raised the amount for the three-month securities, securing P5 billion as demands reached P21.412 billion.

Likewise, the average interest rate for the 182-day T-bills also dropped to 5.893 percent from the previous 5.930 percent. Total demands reached P19.910 billion.

Finally, the average rate for the 364-day T-bills shrank to 6.037 percent from 6.056 percent. The government raised the amount for the one-year securities, securing P7 billion instead of the initially planned P5 billion, as the total bids reached P18.519 billion.

The government successfully raised funds through the sale of short-term debt papers due to lower interest rates following mostly softer gross domestic product growth and inflation rate.

The national government on Monday, May 13, made a full award of all its short-term debt papers even after upsizing the 364-day tenor. Total demands totaled P59.84 billion.

The 91-day Treasury bill saw a decline to an average of 5.727 percent compared to the previous week's 5.780 percent, raising the programmed P5 billion, with total tenders reaching P21.412 billion.

At the secondary market, the yield on the three-month bill is higher at 5.782 percent, based on PHP Bloomberg Valuation Reference Rates data.

On the other hand, the average interest rate for the 182-day T-bills also shrank to 5.893 percent from the previous 5.930 percent. The planned P5 billion was fully awarded.

This is lower compared to the 5.908 percent quoted at the secondary market.

Meanwhile, the government opted to increase its borrowing from P5 billion to P7 billion for the one-year securities, as total demands reached P18.519 billion.

The interest rate for the 364-day T-bill also declined from 6.056 percent to 6.037 percent in the previous week. It is also lower than the 6.075 percent in the secondary market.

Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort said lower yields may be attributed to favorable economic growth data which could lead to dovish signals from local monetary authorities at the coming monetary policy-setting meeting and eventually support and justify possible local policy rate cuts.  

• International edition
• Australia edition
• Europe edition

Australia budget 2024: the six graphs you need to see

A surplus matters less than what choices the government makes in its budget – here’s what Jim Chalmers’ statement tells us

• Federal budget 2024 reaction – live updates
• Explore all of our 2024 budget coverage
• Karen Middleton: ‘Labor is trying to ease Australians’ cost-of-living pain in the hope voters repay the favour’
• Get our morning and afternoon news emails , free app or daily news podcast

A bigger surplus this year and a bit bigger deficit next year! Does it matter? As I noted last month , not really. But while the surplus might not matter, the choices in the budget do, so let’s have a look at what the budget tells us about the economy and some of the choices the government has made.

No real change in the budget balance

One of the things to remember about the treasurer announcing a changed budget deficit or surplus is that it really just means the Treasury estimates were more wrong than they expected.

It is no different from if, for example, in January the AFL predicted 80,000 people would turn up to the Anzac Day game between Collingwood and Essendon, but then because the weather is nice and Essendon are winning more than expected, 93,000 turn up.

If the AFL had instead predicted a crowd of 93,000, that wouldn’t make the day any better or worse, just that the AFL was better at predicting the crowd.

The same with the budget. Last year the budget predicted a deficit of $13.9bn with $668bn in revenue. By December, the midyear economic and fiscal outlook (Myefo) predicted a deficit of $1.1bn with revenue of $685.3bn.

And now we have a surplus of $9.3bn with revenue of $692.3bn.

It didn’t come from any great policy moves by the government but by the predictions of “economic parameters” being wrong.

While the government will crow about the surplus, come 1 July we’re into a new financial year and back into predicted deficits – bigger than expected in December but still smaller than was predicted a year ago. And this all just highlights how silly the debate over “improved” or “worse” budget bottom lines is.

Four of the budget years have smaller deficits (or a bigger surplus) compared with what was predicted a year ago, but three have bigger deficits compared with the Myefo figures.

This is neither good nor bad. What matters is what the government is choosing to fund and how and who and what it chooses to tax.

Let’s not forget stage three

Because it was announced back in February, the changes to the stage-three tax cuts are easy to forget, but they remain a major part of this budget and things could have been a lot worse:

Under the old stage-three cuts, people on $200,000 were going to get a 4.5% ($9,075) tax cut, while those on median incomes of $67,600 were getting just $565 (0.8%). Now median income earners get a 2.0% ($1,369) tax cut, which is only slightly below the 2.2% ($4,529) cut going to those on $200,000.

Not perfect. But a very good choice by the government.

Choices made on jobseeker

But those earning less than $8,200 are still wondering what’s in it for them. As I wrote two weeks ago , the government’s own Economic Inclusion Advisory Committee had recommended jobseeker be raised to 90% of the age pension. The government chose to ignore that recommendation. Instead, it is increasing jobseeker only for those with conditions that mean they are limited to working less than 14 hours a week. This will help about 4,700 people.

They have also chosen to increase commonwealth rental assistance by 10% off the back of a 15% rise last year, and everyone gets $300 off their power bill.

Sign up for Guardian Australia’s free morning and afternoon email newsletters for your daily news roundup

Both these measures will reduce inflation. Rental assistance goes to those on low to middle incomes who are hardly in a situation where they will take the extra money and spend wildly. And the energy rebate is large enough to make an impact on inflation but not enough to significantly affect overall demand in the economy.

These measures are welcome but what we know from earlier in the pandemic is that the best way to reduce poverty is to give those in poverty more money (seems a bit obvious).

The government has chosen to keep those on jobseeker in poverty – now almost $225 a week below the poverty line.

after newsletter promotion

Lower inflation but lower wage growth

As reported, the budget predicts lower inflation than the Reserve Bank of Australia. This is not surprising, given that the RBA governor, Michele Bullock, had even noted that the RBA was not able to take into account the measures in the budget.

The RBA predicted that by June next year inflation would be 3.2%, while the government predicts it will be 2.75%. And yes, that sounds a big difference, but to be honest it’s not.

Think of it this way. If you spend $150 on shopping today, and in a year’s time prices have gone up by 3.2% that will then cost you $154.80; if prices only go up by 2.75% it will cost you just $154.13.

Neither 3.2% nor 2.75% should make any difference to interest rates – the next move should still be a cut and the issue of inflation will likely become one of political barracking rather than economics.

As ever when talking about living standards, you need to remember not just inflation but wages growth.

Both the RBA and the budget predict wages rising but, while the RBA estimates wages growing by 3.6% in June next year, the budget estimates just 3.25% growth:

All up over the next four years, the budget predicts that real wages will rise by 3%.

That’s certainly not at a pace that should have anyone except the most shrill members of the business community complaining about a “wages breakout”.

Even if these predictions come true, by the middle of 2028 the average value of Australian wages in real terms will still be 2% lower than before the pandemic.

This means that for someone earning $80,000 in March 2020, their wage in 2028 will be equivalent to just $78,420.

The economy is still weak

The government has lowered its estimates for GDP growth next year from 2.25% to 2.0%. It revised down the estimate for household spending growth for this year from a pathetic 0.5% in the Myefo figures to a truly scary 0.25%.

We are not spending. There is no sense whatsoever of too much demand from people. We are in effect not adding much to the economy at all.

That is dire.

In that context, and the mere 2% consumption growth forecast for next year, the increased public demand next year is well designed – austerity and a bigger surplus would have been to aim for lower inflation by way of a recession.

This weakness in the economy also reminds us that the fears about the “government fuelling inflation” is code for wanting more people to be unemployed.

Similarly, the worries that the Future Made in Australia policy is about killing off the private sector and committing to major government intervention are unfounded. Overwhelmingly the forecast spending on this policy is through tax incentives all contingent on companies investing in the first place.

Whether or not this is the last budget before the election, the government has kept a fair bit up its sleeve. Nearly 40% (or $5.75bn) of the new spending in 2025-26 and 2026-27 in this budget remains “not yet announced”.

So we wait for the announcement not only of the election, but also this new spending.

• Australian budget 2024
• Grogonomics
• Australian economy

Most viewed