Question

Discuss the burdens of the national debt (public debt). How does the burden of the national debt held by foreigners differ from the consequences of the debt held by local citizens. What are the consequences of budget deficits?

How could we reduce budget deficits?

What is the trade deficit?

Answer 1

National debt is the borrowing done by the country's government to fund it's shortfall / deficit. The national debt is referred as burden to the government because-

- it will increase the interest payments for the government

- it will hike the interest rate in the country

- place burden on future generation who will have to repay the debt

- heightens the risk of crisis in financial markets

Typical examples of national debt are Treasury Bills, treasury bonds.

These can be bought by both domestic investors and foreign investors.

When the foreign investors hold the debt, it introduces an additional factor called currency risk. When huge inflows or outflows happen for the purpose of purchasing / selling these debt, it creates huge demand supply crisis in the foreign currency market.

If these investors are domestic, the problem still remains but the currency risk also will be reduced.

Annual Budget deficit accumulation is the total national debt. The consequences of the budget deficit are listed above.

Reducing budget deficit - this can be done either by increasing the revenue or reducing the spending. When the income increases, requirement for the funds are satisfied by this income increase. Or when the spending is cut lower then the requirement reduces and hence deficit will be lower.

Trade deficit - this is the shortfall in the trade balance, where the imports is more than the exports. Trade balance usually refers to the trade the companies in the country do outside the country. Trade will be in Balance when the export is equal to import. When the import is more than exports it is trade deficit and when exports more than imports it is called trade surplus