National debt results from a nation’s government spending more money than it collects in taxes and other revenues (income). Such spending causes budget deficits (shortfalls). In the past, governments sometimes printed extra money to cover deficits. That activity almost always caused serious inflation (rapid increases in prices). Today, governments usually borrow to cover the shortfall. The amount borrowed becomes part of the national debt. See Inflation .
Budget deficit financing and the national debt.
Most countries finance their deficits by selling securities. Securities are investments that can be bought and sold in a financial market. Most government securities are _bonds—_certificates issued that promise to pay back money that has been borrowed. When a government sells securities, it is borrowing money from the buyers of the securities. The national debt increases by the face value of the securities a government sells. Governments pay interest to the owners of their securities.
National debt and GDP.
Since the late 1900’s, the debt of many national governments has greatly increased. Economists often compare the amount of a country’s national debt to the size of its economy. Such a comparison allows economists to judge the seriousness of a nation’s rising debt. In most cases, the size of a nation’s economy is measured by gross domestic product (GDP). GDP is the value of all goods and services produced in a country during a given year.
Most people will earn more income as GDP grows. Therefore, the amount of revenue a government collects from personal income tax, payroll taxes, and other taxes rises as GDP increases. GDP, then, is one way of measuring a government’s ability to generate revenue. It also gives an indication of a country’s ability to pay interest on and repay debt.
Economic growth and rising national debt.
Sometimes a government continues to borrow heavily during a time when employment is high and the economy is operating close to full capacity. In such cases, the cost of borrowing rises for almost everyone. As a result, a government is forced to pay higher interest rates to those who buy its securities. It also becomes more expensive for businesses to borrow money. Some businesses may delay spending for new buildings and equipment. For this reason, the rate at which a nation’s economy can expand its production of goods and services slows down. Fewer new jobs are created. Incomes rise more slowly.
Experts have a difficult time knowing the exact point at which the growth of national debt holds back a nation’s economic performance. Research suggests that the growth of a nation’s GDP may slow down when the ratio of a government’s debt to its GDP becomes larger than 90 percent.
Economists predict that many governments will face the difficult task of reducing the ratio of debt to GDP in the future. Older people make up a growing percentage of the population in a number of nations. Financing retirement and health care programs for them will become increasingly costly. In the United States, for example, large numbers of retiring baby boomers (people born between 1946 and 1964) will soon cause spending on such programs as Medicare and Social Security to grow rapidly. This growth will affect annual budgets and national debt in the United States. The government will need to decide how it can maintain its social commitments to the elderly while preventing the national debt from rising to a point that threatens overall economic living standards.
Many people recognize the need to reduce budget deficits and limit the growth of the national debt. However, politicians disagree about how to achieve those goals. In 2011, for example, a proposal to raise the U.S. debt ceiling triggered widespread debates about deficit spending and the national debt. The debt ceiling is the legal limit on the size of the national debt. Some members of Congress insisted that budget deficits be reduced by cutting government spending without raising taxes. Other members demanded higher taxes on wealthy individuals and corporations. They also opposed any changes in Social Security and Medicare. Still other members of Congress favored a combination of approaches. They called for carefully controlled government spending, higher taxes on the wealthiest Americans, and tax reform.
Congress eventually voted for a compromise bill that increased the debt ceiling. However, the differences of opinion among political opponents were not resolved.
See also Gross domestic product (GDP) ; National budget ; Savings bond .
