Question

3.Public debt arises as a result of financing successive budget deficits through borrowing. The public debt stock as at March 2020 stood at US$ 236.1 billion according to the Bank of Kenya. There have been arguments for and against borrowing by government and the opposition all these years depending on where they find themselves. As a student of Public Finance, is borrowing good or bad? Justify your position by coming out with all the relevant arguments for and against your decision.

Answer 1

Borrowing is good if it is kept under controllable levels as it ensures the following functions in the economy:-

• In situations of recession, debt financing via government can provide the boost to the economy.
• such a boost also encourage private sector to perform more efficiently.
• Purchasing power of people increases and this lead to increased consumption on their part and increased economic growth.
• It provides necessary resources to the government to carry out tasks at hand for which it can pay later
• It strengthens the backbone and financial sector of the economy and helps to keep them in check
• The money borrowed and invested is multiplied with greater returns via the mechanism of money multiplier and investment multipliers.

But the borrowing has to be kept under controllable levels as it may lead to financial crisis and formation of a hyper inflation bubble which when burts leads to collapse of financial structure in the economy. This leads to inablitiy to even pay the interest component of the debt for which governent may need to borrow more money to pay off its debt and it may get caught in a DEBT TRAP.