National Debt

641 words | 3 page(s)

This paper concerns the problem of national debt. It will begin by giving an understanding of what national debt is together with some of the consequences that may result from it. It will then consider various strategies that can considered in order to reduce the size of a particular national debt while still maintaining the possibility for growth and development.

National debt can be understood to be the amount of debt held by a nation, most often quantified and qualified in state bonds issued to various creditors. While national debt to some extent or another is almost a ubiquitous part of the global economy, recent developments such as the global financial crisis and the necessary austerity measures that this has led to, particularly in Europe, have drawn attention to the dangers that an over reliance on this debt can hold. National debt often comes about as a result of what is termed deficit spending and it is also assumed that this spending may be a potential way to eventually decrease the deficit through stimulating growth (Investopedia, 2013).

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It is sometimes argued that an increase in deficit spending is necessary in order to generate growth and therefore the conditions in which recovery and a reduction of a deficit may be possible. Economists point out that a government incurring debt need not necessarily be a disadvantage, as long as this debt is understood and is managed correctly. Thomas writes that; ‘If the money would have been used for consumption goods or remained idle in bank accounts, and the government uses it to purchase needed infrastructure instead, then this is better from the perspective of future generations since it enhances the productive capacity that they will inherit’ (2011). Deficit spending can bring real material advantages in the short term. For example it may improve infrastructure, may free up money for education spending and may be generally spent on public services, which may in themselves begin to attract capital investment, as well as boosting employment and growth levels.

Deficit spending also has several clear disadvantages and potential problems associated with it. One of these, of particular relevance in America, is the increase of the level of national debt. It is often the case that, once debt reaches a certain level it is extremely difficult to return to anything close to a budget surplus. Ingram notes that it is extremely difficult to spend one’s way out of debt, as debt increases interest payments become exponentially more high. This is especially the case when it come to U.S. Sovereign Debt which currently stands at $14 Trillion. Ingram writes; ‘Debt adds interest charges and fees on top of listed prices. Transferring one debt to another to maintain deficit spending can have a compounding effect, where interest accumulates on previous interest charges.” (Ingram, 2013).

A second possible way to reduce national debt is simply to increase taxes and to cut public spending through the implementation of austerity measures. While this is theoretically sound, it is also the case that such action may lead to what is known as ‘crowding out.’ This occurs as states attempt to recuperate a deficit through the raising of taxes. The attempt to do this inevitably leads to a situation in which companies suffer from a higher rate of tax and individuals smaller companies, who may have been instrumental to past experiences of growth, find themselves crowded out of an increasingly difficult and competitive market.

In conclusion, this paper has considered national debt. It has argued that two possible solutions for a the problem of large amounts of national debt may be deficit spending to stimulate growth and also the increase of taxes in order to generate more income. Both of these strategies, however, come with significant disadvantages and serve to show how much of a complex and difficult problem national debt can be for contemporary economics.

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