Question

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 GHC 236.1 billion according to the Bank of Ghana. 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

Public debt arises as a result of financing successive budget deficits through borrowing. The public debt stock as at March 2020 stood at GHC 236.1 billion according to the Bank of Ghana. There have been arguments for and against borrowing by government and the opposition all these years depending on where they find themselves. So we can decide whether a public debt is good or bad, only after analysing the arguments in favour of and against public debt.

Arguments in favour of public debt -

• In the short run, public debt is a good way for countries to get extra funds to invest in their economic growth.
• Public debt is safer than foreign direct investment(FDI) as government can use it according to their choice without giving any rights or ownership to the investors.
• Public debt is attractive to risk-averse investors since it is backed by the government itself.
• public debt improves the standard of living in a country. It allows the government to build new roads and bridges, improve education and job training, and provide pensions. This spurs citizens to spend more now instead of saving for retirement. This spending by private citizens further boosts economic growth.

Arguments against public debt -

• Governments tend to take on too much debt because the benefits make them popular with voters. So if too much debt is available it may be used in a non productive way leading to loss.
• A large portion of the National Income or GDP is spent on paying the interest on these debts.
• Too much debt is bad for economy as there is a healthy debt/GDP ratio, above which it is unfavourable for economy.

From the above points we can conclude that though public debt have some disadvantages but it is very important for a developing and also for developed Nations. This is because it is through public debt that government finances its different development projects. These projects are very important for the countries to develop and hence public debt is good for the economy.