NATIONAL DEBT

The financial liabilities or the money that government owes to its creditors is
known as National Debt. This money can be achieved through issuing of
bonds, notes, and bills which are bought by the creditors or by the ones who
want to invest their money. This includes public too. This liability that is
known as National Debt is only favorable as long as it produces higher than
the amount the government had borrowed from the public.

National Debt is usually responsible for directly affecting the people as it

becomes a burden for many. The government has to pay more interest rate
payments on those who hold bonds, as the National Debt increases. This
causes a huge percentage of tax revenue going to debt interest payments. In
some situations, huge borrowings can raise the interest rate because markets
are tense and fearful about government’s ability to pay off and they demand
higher bond yields against perceived risk. During high inflation, the investor
also demand higher bond yields e.g in the 1970s, there was an increase in the
bond yields due to high National Debt.

A further disadvantage is the inflationary pressures. As it is infrequent for

the National Debt to cause inflation. But some governments may be tempted
to deal with high levels of debts by printing more money. This will lead to
increase in the inflationary pressure due to increase in the money supply.
This will also cause reduction in the value of exchange rate and would make
the foreign investors unwilling to hold that country’s debt.

National Debt also leads to increase taxes in future. If the debt to Gross
domestic product grows quickly, the government may need to reduce debt
levels in the future. This means future budgets would need to raise taxes.
The threat of this is that if taxes are increased very fast, it could blow out the
recovery and cause a further recession.