Question

what can be done about the national debt

Answer 1

1.The national debt is also called the sovereign debt. Whenever a country spends more than it earns through taxes, it's in a debt situation. The debt can be in the form of public debt, which a government owes to its own public. This can be on account of bonds issued. The second type of debt which accounts for majority of country's debt is intra-government debt which it owes to other countries or sovereign bodies.

2.Before we arrive at the solutions, let us have a brief look at the causes of national debt:

a)Most of the countries are heavily reliant on oil and gas for their industries. This oil is imported as there are very few oil producing countries and this s one of the major causes of debt.

b)Countries have taken huge debts to improve their infrastructure. This may be to build roads, improve industrialization etc.

c)Many countries have defaulted on their debts, thus making their credit score fall. This leads to more expensive debt which becomes difficult to service.

d)Expansionary policy is another reason for a country's debt. Countries go for tax cuts to increase public spending and this leads to an increase in national debt.

3.Ways to handle national debt:

a)Raising taxes - However unfavorable this may sound in public opinion, raising taxes is one of the easiest way to repay and reduce national debt. A government can steadily increase taxes over a few years to get over debt in cases of serious crisis.

b)Reduce spending - A government should opt for a balanced budget with controlled spending along with increasing taxes. This is a conservative approach but very effective in reducing debt.

c)Issuing bonds - This approach can be used by governments to get cash to fund their operations. Governments issue bonds to public. This is a form of debt but this avoids raising taxes and gives a boost to businesses and thus improves tax collections. However this may not work for countries with bad credibility as it may be difficult to raise debt in their own currency. So in this case the bonds can be raised in foreign currencies.

d)Changing interest rates - Governments can take a pro-trade approach by reducing interest rates as well. The government reduce taxes which leads to increase in public spending and boosts the economy ultimately increasing the tax collection of the government.

d)Bailout - Many countries have been bailed out that is given cash by other cash rich countries. History has shown that this is not a very effective way as countries have been bailed out only got an intermediate help and fell back into huge amounts f debt.

e)Restructuring of debt or declaring bankruptcy is the least popular method and countries resort to this in case of despair and failure to work out with other methods.This leads to an unfavorable situation for the borrower.