Macroeconomic National debt
National debt refers to the money owed by the government. National debt can be internal or external. Internal debts are owed to the people and organizations within the country. External debts are owed to foreign lending organizations. Government borrows on short term (for a short duration) or on long-term basis. There are various tools of borrowing internally, for example, bonds, securities, direct borrowing among others (Davis, p. 32). Due to the increasing effects of global economic recession that was experienced recently, governments are increasing their national debts to cater for the increasing expenditure on unemployment benefits and to reconstruct industries which collapsed during the period. The reduced tax receipts have forced governments to increase their national debts to fill the gap created by the reduction in tax payment (Wormell, p. 239).
The problems of having a national debt which keeps getting bigger
Increasing national debt increases the tax burden to the taxpayers. National debt is repaid from the income collected from taxpayers. Taxes create a huge burden to the citizens of a country. Increasing the debts creates an additional burden to the tax payers. Citizens to a country may lack confidence with the government when taxes increase. A good tax system should not over burden the tax payers (Taylor, p. 314).
National debts affect the value of the currency used in the economy. When a country borrows money, it spends it in financing national projects. This increases the money in circulation within the economy. Inflation increases as the prices of commodities persistently increase. Increasing national debt causes devaluation of the national currency. This is caused by the increase in value of the currencies from other nations operating in the global money market. Devaluation of the currency affects the performance of national activities and the burden of the debts increases (Harris, p. 191).
Trade deficits increase with increase in national debts. Trade deficit is the difference between the exports and imports. When a country increases its national debts, it uses most of its income from exports to repay the debts. This decreases the value of the exports and increases the value of imports. Increase in trade deficits affects the balance of payments to a nation. National debts affect the international trade since countries have a restriction on the amount to borrow and the payment patterns (Wormell, p. 233).
Increase in national debt increases the interest expense paid to the creditors (Carvounis, p. 197). The debts should be paid at a given interest at a given period of time. The interest expense is computed as expenditure in the national budget. This expense withdraws money from the economy since it is not a direct expense. The people of a country do not benefit from the interest expense but increases the tax burden. Increasing national debts increases tax burden to the taxpayers (Harris, p. 211).
Many countries have experienced debt crisis due to the increase in the national debt. Dubai crisis has been created by over reliance on national debt to finance national projects. The country has encountered a national crisis since the economy has been unable to repay the debts. The creditors have declined the offer to freeze repayment of the debt for six years. Most of the economic activities have been adversely affected. Unemployment has increased due to low national investment (Taylor, p. 312).
Conclusion
National debts should be used only when there is a crisis in the economy. There are many bad effects of national debts than the benefits to a country. The government should use other tools of funding activities since national debt create a big problem to the national economy.