Government Debt 101
Debt, a term that sounds familiar, right? It’s so easy to imagine that someone runs into a credit card or pay later methods of payment (re: shop**paylater), and boom, the miserable time comes. They try so hard to create a payment plan and pay off it to avoid bankruptcy and card or account blocking. In fact, everyone, every organization, and every business can deal with debt, including the government.
Image 1: Government debt infographics as a globe
Source: Visual Capitalist, 2022
According to the Corporate Finance Institute, country or national or public debt refers to the accumulation of the country’s annual budget deficits that are held by the public and intragovernmental debt. A deficit occurs when the country spends more than its ability to collect or lacks money management. Mostly, country debt comes from bonds and other debt securities like the World Bank or International Monetary Fund. To pay it off, the country usually borrows money by selling the debt to investors. While the debt can be measured in country currency, it also can be measured by GDP (Gross Domestic Product) in a percentage score. As said in the debt-to-GDP ratio formula, when a country’s economy grows, the amount of its revenue can be used as well to pay its debt.
Image 2: An example of applied Debt-to-GDP ratio formula in Indonesia
Source: tradingeconomics.com, IMF, 2022
Generally, the greater the rate of economic growth the country has, the more the country’s capital will increase. The government can see it as an opportunity and treat it as an advantage to produce more debt. The country’s ability to pay off debt and the effect it has on its economic situation mostly depends on how much the debt is as a part of the overall sustainable economy.
Why can a country be in debt?
A country usually has debt because it must be able to finance the growth and development of its economy. This is similar to how a company would take out a loan to finance its business and operation, or how a family would take out a loan to buy its dream house. Like Forbes said in its article, countries that have immense amounts of short-term debt have greater financing needs with the catastrophe following it by reducing their debt capacity while increasing their default risk.
But, there is no 100% right or wrong in this cyclical game. Right now, economists and lawmakers continually argue about how much a country’s debt is allowed. Most of them state confidently that some rank of debt is required to facilitate economic development. Paradoxically, the World Bank states that there is a moment when the debt can evolve into huge trouble. The amount of the debt makes the poison itself. If the debt’s sum becomes too huge, it can result in government schedules cuts, tax increases, and economic turmoil.
Then, how do countries recover from it?
Lowering debt and promoting the economic rate are the most basic goals every country is looking for. Yet, achieving those goals often involves tactics that seem downright contradictory. Rather than increase taxes, countries often prefer to issue debt in the form of bonds to gain more money from investors and the public interest. Tax increases? Who will like it, huh? Furthermore, issuing debt allows them to provide money to pay expenses, while also stimulating the economy through public spending, which produces additional tax income from advantageous businesses and taxpayers. In its published article, the Council on Foreign Relations said that dealing with debt is a problematic dilemma. While issuing debt appears to look like a logical and beneficial strategy, keep in mind that the country must pay interest to its creditors, and unquestionably, the loan must be repaid.
In the end, the country’s debt isn’t something so awful and terrible. If the country can manage it well and spend it at the right time, in the right place, with the right amount, and for the right goal, it’s totally okay as long as they have the strategic and secure payment plan to definitely pay it off.
Written By: Rosella Veltin
References:
Investopedia. (2022). What The National Debt Means To You. Retrieved April 6, 2022, from https://www.investopedia.com/updates/usa-national-debt/
Radcliffe, B. (2021). How Countries Deal With Debts. Investopedia. Retrieved April 6, 2022, from https://www.investopedia.com/articles/economics/10/sovereign-debt-default.asp#:~:text=Most%20countries%20%E2%80%93%20from%20those%20developing,loan%20to%20buy%20a%20home.
Amadeo, K. (2022). Who Owns the U.S. National Debt?. The Balance. Retrieved April 6, 2022, from https://www.thebalance.com/who-owns-the-u-s-national-debt-3306124
Smith, L. (2021). How Governments Reduce the National Debt. Investopedia. Retrieved April 8, 2022, from https://www.investopedia.com/articles/economics/11/successful-ways-government-reduces-debt.asp#:~:text=Rather%20than%20raise%20taxes%2C%20governments,of%20 bonds%20to%20raise%20money.&text=Tax%20 hikes%20alone%20 are%20 rarely,have%20helped%20lower%20the%20deficit.
Corporate Finance Institute. National Debt: Overview, Classification, and Instruments. Retrieved April 10, 2022, from https://corporatefinanceinstitute.com/resources/knowledge/economics/national-debt/
Coppola, F. (2018). Everything You’ve Been Told About Government Debt Is Wrong. Forbes. Retrieved April 11, 2022, from https://www.forbes.com/sites/francescoppola/2018/04/17/everything-youve-been-told-about-government-debt-is-wrong/?sh=2bb66cfd314f
M. Ayhan Kose, et al. (n.d.). Global Waves of Debt: Causes and Consequences. World Bank. Retrieved April 12, 2022, from https://www.worldbank.org/en/research/publication/waves-of-debt
McBride J., Anshu Siripurapu. (2021). The National Debt Dilemma. Council on Foreign Relations. Retrieved April 12, 2022, from https://www.cfr.org/backgrounder/national-debt-dilemma
