Essay Plans

What is the National Debt? Is it a burden?

SYNOPSIS:

POINTS:

  1. Define national debt and show how it is broken down into deadweight and reproductive.

  2. Support the above with current figures.

  3. Note: the national debt may be considered in terms of liquidity, marketability and source.

  4. To assess whether it is a burden, the National Debt must be related to GDP, PSBR, CGBR, inflation, growth and national resources.

  5. In relation to GDP the National Debt has fallen steadily. The government borrows in money terms, thus as inflation rises, the debt falls. (A brief note on the three types of PSBR would help : inflation-adjusted, full-employment and demand weighted).

  6. The cost of the debt is interest. From 1977 to 1984 debt interest was almost constant as a percentage of government expenditure - 10.2% to 10.7% in 1984.

  7. If borrowing increases the interest rate may rise but this involves only two parties: taxpayers (transfer payments from) and government bond holders (transfer payment to) and is not a NATIONAL burden.

  8. Even though interest rates in the main (ignore May 1988) are high in UK if inflation is higher, then the government gains and the debt-holder is loser.

  9. The greater the debt, the greater the costs incurred in the servicing of the debt; this depends on liquidity of debt, original rate of interest and the size of the debt.

  10. The part of the debt that IS a burden would be the deadweight debt; ie, if one borrowing finances current spending with no tangible benefit to future generations. Building a hospital is reproductive debt as a service will be provided during the servicing of the debt. The classical example given of a deadweight debt is borrowing to finance wars - and this is a large part of the National Debt.

  11. Finally, if the debt holders are external to this country there will be an outflow of payments on the invisible account of the Balance of Payments. This is a drain on resources and - more likely with a lesser developed country - may seriously impede development.

    Note: a recent scenario has become a distinct possibility: Brazil borrows; Brazil cannot pay back; Brazil needs more money to prevent the damage being done to the ozone layer - damage that will in time affect everyone; Brazil is offered more money. Blackmail or finance imprudence and inefficiency?

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