What are the Problems of high government borrowing?
There are many theoretical problems of high levels of government borrowing. But, usually these problems don’t materialise under normal circumstances. However, as government borrowing as a % of GDP increases, the problems of government borrowing are exacerbated. With UK facing an annual budget deficit of over 11% of GDP, there are many potential problems.
Higher Debt Interest Payments. As borrowing increases, the government have to pay higher interest rate payments to those who hold bonds (lend government money). In some circumstances, higher borrowing can push up interest rates because markets are nervous about governments ability to repay. This means they have to pay even higher interest rate costs. Currently, the UK pays approximately £43bn in interest payments.
Inflationary Pressure. It is rare for government borrowing to cause inflation. But, the combination of quantitative easing and very high levels of borrowing make inflation more likely.
If markets fail to buy enough gilts to finance the deficit, the deficit can always be financed through ‘monetisation’. i.e. creating money. This creation of money creates inflation, reduces the value of exchange rate and makes foreign investors unwilling to hold UK debt. So far quantitative easing has not caused inflation because of the falling velocity of circulation. But, if the economy was close to full capacity, printing money to ‘monetize the debt’ would lead to inflation. In the case of Zimbabwe this could lead to hyperinflation.
Higher Interest rates.
To finance a budget deficit, the government need to sell bonds. If markets fear there is a chance of default, they will demand higher interest rates to give return for greater risk. Countries in the Eurozone experienced rapidly rising interest rates because of markets fears over their ability to repay. (see: bond yields on EU debt)
Higher interest rates on government bonds tends to push up other interest rates in the economy and reduces spending and investment. (This impact of higher interest rates in reducing private sector spending is known as financial crowding out)
These higher interest rates increase the cost of paying interest payments.
Crowing Out. A classical monetarist argument is that high levels of government borrowing cause ‘crowding out’. What they mean is that the government borrow from the private sector by selling bonds. Therefore, the private sector have less money to spend and invest. Therefore although government spending increases, private sector spending falls and there is no boost to the economy.
However, this is unlikely to apply in a recession because in a recession private sector saving is rising. The government are spending to offset the rise in private sector saving.
Higher taxes in the future. The government will need to reduce borrowing as a % of GDP. It means future budgets will need to increase taxes and / or limit spending. The danger is that if taxes are increased too early too quickly it could snuff out the recovery and cause a further downturn. If they don’t raise taxes markets may be alarmed at size of borrowing. There will be difficult choices for the future chancellors; it is a difficult situation to be in.
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Hello Tejvan,
It is very interesting to read your analyses learnt of the meanings accredited to the circumstances the population of a country bears when times are hard so to say!
Being of an unqualified background my right to freedom of speech still remains therefore with the experiences collected whilst in personal and economical turmoil it has become blatantly obvious to me that the old blame game can easily be attributed to each others policies of whether using borrowed funds to keep a harminious society or should i say community in the countries we live is either appropriate or unappropriate.
Though in reading the teachings which are applied to all students of economics I do feel you do actually have to use the art of sitting on the fence with your opinions whilst relaying the information into ledgable knowledge that every individual can decide which way they believe to be correct the same way we choose our own religious beliefs non-doctrinated.The format you have offered us to access is obviously the one you have been taught therefore the question arises in my head whether certain schools of thought universities in this case ,actually define their currculms along the line of political views and in my cities case would the offering of termination of academic contracts mean that this university is about to change the way it teaches?Sommoning up an example of this thought may be the alighning of views to political parties with say Cambridge for Labour and Oxford for conservative would i be correct in assuming this affilation ot these think tanks are alreadfy in place in the U.K.similar to the lines of thought where certain Universities specialise in subjects?
Regarding unemployment it is also obvious to those who have or are experiencing this process in the majority feel a change is good , though the underlying fear of taking away the options of being able to do limited hours should be retained and maybe an idea i have mentioned of a time bank accrued in the job centre working with agencies/training providers may be a fairer way forward to stop corruption and even idleness.
Most in the unemployed/public sector of the population do not wish to become the scape goats of those fortunate to be able to apply themselves to continous employment and to be fair the secret of this lies in the ability to either serve your country in the forces/public sector for a period that allows you to accumilate a pension fund allowing you to accept lower wages when leaving as in the case of the people who were actually taught the knowledge at a very young age which parents and teachers today must not forget as this encouragement in the younger years allows a person to have a more expansive life experience .
This also gives us in economic terms the reason to justify good pensions as these are the accrued funds aligned with prosperity and depression of funds set aside for slow release at certain stages of a countries population and as you say funds which a country may lend funds from in lean periods at low fix rate bonds.I realise now the prerequisite of the theory of a job for life exists for those who toe the line so to say and do not experience any social variences that require the assistance of the public sector and do not forget this includes the N.H.S.Differentiating experiences in the wealth of the population could be ilminated if we were all non-problematic humans then we would have the answer to a debt free Utopia where no-one got paid and life became sterile.
This could also relate to where the G.D.P Is at lower levels where the population is affodable in terms of revenues coming into the country from natural resources,the breaking up of oversized countries such as the U.S.S.R ,India and maybe in time China the main reason for this action is either the country not having the infrastructure and public sector to service a growing population hence the desire of the minority in wealth control will want to be cost effective as a nation provider.These facts allow a person to choose how they would wish to perceive the management of a countries population should be carried out.
Summing up this information we may assume that economics can be seen to be going through a stage of reform with us as Westerners being infactuated by blaming ourselves through the use of information providers in the form of goverments using facts and figures to prove our inadequacies as unworthy citzens of established nations who have built infrastructure on fairness with morals rather than the failings of the past where we to were ascociated with being the profiteers , polluters and non-social harmony providers we now have to label the reforming nations of our time.