Question

In a recent economic report, it is stated that the Malaysian government’s debt has reached RM777.1 billion in March 2019.

a) What is the primary cause for governments all around the world, including Malaysia, to accumulate public debt?                                                          (1 mark)

b) What is the commonly used indicator to ascertain how serious the level of a government’s debt? What is the logic behind the use of this indicator?  

        

c) What would be the problems faced by the country/people if the government debt is too high.

Answer 1

a.

This is the debt or loan taken by a government from internal sources (like lenders of the country itself) or from external sources (like lenders of other country, world bank, etc.).

Cause: The main cause of public debt is to meet the annual budget deficit of that government – if government spending is higher than the government receipts for an year then there is budget deficit and it could be financed through a public debt.

b.

The common indicator is comparing between gross and net public debt.

Gross debt is the total future payment obligation without adjusting a counterbalancing of debt, which is a deduction of asset value of the government.

Net debt is the gross debt by a deduction of government’s asset value.

If the gap of gross debt and net debt is high, the public debt becomes serious.

Logic: Net debt is an adjustment. If the government can adjust with its own asset value with the gross debt, the actual debt becomes the minimum. If the government doesn’t have assets to adjust, the loan becomes serious. Therefore, the logic is to find the internal strength of the government.   

c.

Problems:

No.1) people of the country have to pay higher tax, since tax is the source of income of government. Higher tax means lower consumption, lower GDP, and lower growth.

No.2) the country may face difficulty of getting foreign collaborations and trading – these are necessary for development.