Question

Is government debt good or bad? Please answer in 250 words or more.

Answer 1

I think government debt is bad for the economy. Firstly, government debt reflects that the country is in a bad financial state and the credit ratings of the country fall. This reduces the investment prospect in the country, which again lowers business activities and tax revenue. Therefore, a debt-cycle is created. Secondly, high government debt results in high-interest payment which puts strains on the budget of the government and leaves it with little money for the social sector payments. Because of these various social sector needs (for example needs for better educational institutes or healthcare systems, etc.) remain unfulfilled and the infrastructure of the economy suffers as well. Thirdly, when the government debt is high, the government has less scope to implement fiscals policies because of its limited budget and a limited ability to take more debt. This makes it difficult for the government to effectively tackle recessions. A government cannot take expansionary fiscal policies to tackle recession if it cannot spend more or cut taxes. Fourthly, a high level of government debt increases the chance of default by the government, which can result in a full-blown economic crisis, unemployment, and loss of output. This happened recently in the case of Greece. Fifthly, when the government debt is high, the currency tends to depreciate as the value of the domestic currency falls. This makes export less profitable and this makes domestic manufacturers suffer. Such a scenario results in job loss and lower economic output.

Therefore, high government debt is bad for the economy.