What Is Public Debt And Can It Be Paid Off?

Everyone has heard of public debt. However, few associate it with a personal economic situation. Debts, which represent over a trillion, seem abstract and far removed from real life.

Public Debt

By definition of economic dictionaries, public debt covers nominal debt of public finance sector entities, determined after eliminating financial flows between entities belonging to this sector (consolidated gross debt), incurred for the following reasons:

• securities for cash benefits only (except for equity securities),
• loans (including securities whose marketability is limited),
• loans, deposits accepted, maturing liabilities (ie liabilities with expired maturities that have not been past due or redeemed).

From a practical point of view, public debt is the total liabilities of the public finance sector - the government, local governments and extra-budgetary funds.

The fastest growth in public debt is caused by wars and deep economic crises. In both cases, there is a sharp decline in economic activity (and with it a drop in income) and a simultaneous increase in expenditure. The effect may be a collapse of public finances.

Indebtedness of the state and local governments allows to avoid cuts in expenses and raising taxes. However, you cannot cover the budget deficit indefinitely with credits or loans. The lack of real control of expenditure inevitably leads to a situation in which servicing the public debt becomes so expensive that it is necessary to take out new credits and loans for the settlement of liabilities from previous years. A negative consequence may be insolvency at the level of a local government unit or even the entire state. When an individual goes bankrupt, its debts are taken over by the state treasury.

However, if a state goes bankrupt, there is no one to take over its obligations. In such situations, the government tries to find money to service the public debt. For this purpose, it may, inter alia, raise taxes, freeze wages in the public sector, lower social spending. Such actions influence the situation of the economy and thus the citizens. When the Public Finance Crisis occurs, this is the moment when every citizen realizes that public debt is directly related to his private finances. The quality of life and the level of social security are falling sharply.

Most countries are in debt. Some of them could pay off public debts. To this end, they should cut expenses for many years, resign from issuing debt securities (e.g. treasury bonds) and allocate all surpluses to debt repayment. However, a consistently pursued policy of tightening the belt would in a short time lead to a slowdown in the pace of economic development and, as a result, to a reduction in the standard of living. Properly serviced public debt does not have to negatively affect the state of the economy. Its relation to GDP is of key importance.

Budget deficit

One of the factors of public debt is the budget deficit. By definition, it is current expenditure that exceeds the amount of income earned on standard operations. In order to correct its country's budget deficit, the government may reduce some spending or increase income-generating activities.

Both the level of taxation and expenditure affect the government's budget deficit. The deficit can be the result of: low GDP, an increase in government subsidies, an increase in social spending or tax cuts.

The government can work to reduce the budget deficit by using a fiscal policy toolkit to promote economic growth, for example by cutting government spending and raising taxes. Budget deficits affect individuals, businesses and the economy as a whole. As the government takes steps to reduce the deficit, spending on social programs may be cut. It may also affect infrastructure improvements.

Source: Textbook On Macroeconomics, Dictionary Of Economic