The impact of Government Borrowing on Industry

The impact of government borrowing on industry.

Generally, government borrowing of over 3% of GDP and National Debt of over 60% of GDP is considered to be harmful and if government debt is too high it might start to deter foreign investment.

Budget balance

This is the amount the government need to borrow from the private sector. It occurs because the government is spending more than they receive in taxation. Problems of government borrowing include:

• Crowding out of private sector. It is argued that high government borrowing can cause crowding out. This means private sector investment is reduced because the private sector are lending to the government instead of investing in more profitable private projects.
• Liable to lead to higher tax and lower spending in the future.
• Higher interest rates. It is argued that higher levels of government borrowing tend to put upward pressure on interest rates. This is because the government need to raise rates to attract sufficient people to lend them money.
• High levels of borrowing may by symptomatic of poor government management. i.e failure to collect taxes and failure to control spending. This may indicate poor management of economy.

However, the budget balance doesn’t directly impact on the success of manufacturing industries. Some economies have been able to run a persistently large budget deficit without adversely impacting on industry.

• It could also be argued that a budget deficit is a good thing, if the government is borrowing to invest in infrastructure improvements such as new roads and better communications.

Some developing countries may find it harder to borrow because the private sector don’t trust the government as much. Therefore, the budget deficit will be more significant and lead to higher rates in the future.

Deficit trend

Persistent high levels of government borrowing mean that the National debt will be higher. Consistent high levels of debt may even suggest the government could default on the repayments which would cause serious problems and lack of confidence in the economy.

If borrowing is cyclical i.e. increases in a recession, reduces during growth, then that is to be expected. Governments need to borrow more in a downturn because they receive lower tax revenues.

Public sector debt

Public sector debt is the total amount of debt the government owed. It is the cumulative amount of annual deficits. The issue of public sector debt is similar to the budget deficit. High borrowing leads to growing public sector debt and problems such as the potential for higher interest rates.

With high public sector, the government has less scope for borrowing to invest when necessary.

Public sector debt trend

The trend of public sector debt is important for seeing whether the governments fiscal deficit is growing or diminishing. It doesn’t have a direct impact on manufacturing firms.

Related

• UK National Debt