The danger of government debt

Government debt can become a serious problem. It gets its income from its people through the payment of taxes. When the government wants to spend more money than it gets from taxes, it borrows money through issuing government bonds. A government bond is a promise by the government to repay the amount of the bond with interest on a certain date. The bond is backed up by the government. If the government failed to repay the bond, then its credit rating would fall. People would know that it cannot be relied on and they would not accept any more of its bonds. The government would not be able to borrow any more money.

Government bonds fall due on certain dates and the government must be able to pay out on those dates. To avoid default. So it needs to have funds available to pay the amount due and the interest.

As governments borrow more and more to fund their programs, their liability increases. More and more funds need to be set aside to repay the debt. More and more of the tax revenue has to be used to pay these debts. Less and less is available for domestic expenditures.

Too much debt will destroy the economy

The economy consists of the activities of government and businesses in generating income. Some governments own electricity production and other services that businesses rely on as well as citizens. As more and more of government revenue is used to service the growing debt, less is available for programs. The government may reach a point where its revenue cannot enable it to both repay debt and provide its programs. It will have to cut programs and services or increase taxes or default on debt. Cutting programs and services will hurt the citizens and economy. Increasing taxes will hurt citizens and economy. Defaulting on debt will prevent further borrowing and result in cutting programs and services.

The government must reduce its debt

To reduce its debt, the government must not borrow. It must live within its means and it must pay off debt and not incur any more debt. Spending may have to be reduced. It is inevitable that some government services and programs will need to be downsized or removed.

Greece is an example of what happens when a government can’t pay its debt. The International Monetary Fund had to step in and give the Greek government money to keep functioning. But the IMF required the government to cut spending as a condition for the receipt of this money. So the Greek government had to reduce or remove programs and services that its citizens liked. This caused huge public upset. But it was either do this or not receive the money and have almost nothing.

So government debt is dangerous. It provides a short term fix, but if not dealt with, it will destroy the government and hurt the citizens.

Resources about government debt