Understanding the Basic Concepts of National Debt
The national debt is the total amount of money owed by the government. This refers to any amount of money owed by the government in any level which means the national debt also accounts state and local debt. As this data projects the total amount of money spent by the government compared to what they actually collect from its people, this is often considered an indication of the country’s economic state.
But it should be noted that debt is not only the difference between spending and the accumulated amount through taxation and other revenue streams. If there’s a difference and more spending is done compared to the money collected, the government is having a budget deficit problem. The money they have to use coping with the deficit could come from many sources and these sources are considered debt.
Types of National Debt
Can be classified based on their sources. Part of the national debt could be internal where the sources of national debt are from the public sector operating and residing in the same country. This type of debt is acquired by through issuance bonds, securities and bills. Individuals and companies can be part of this internal debt through these transactions. More often than not, a government will always sell bonds and securities in order to acquire funds for government projects.
The national debt could also be external which simply refers to the any debt owed by the government outside. This is especially true for poor countries that can’t get support from the inside. A common source of external debt is the IMF or International Monetary Fund. It is also possible for a country to borrow from another country through “supernational” groups. A good example is when Greece had to be bailed out by the European Union because of their economic problems brought by worldwide recession.
Issuance of Bonds and Treasury Bills
One of the ways the government collects funds as credit is through issuance of bonds and treasury bills (also called t-bills). This can be acquired by any citizen and company which is a way of helping the government pay for basic services and provide assistance to those in need.
But aside from the fact that bonds and treasury bills aid the government for various projects and programs, these are also considered a very safe source of investment. Bonds and treasury bills are considered a low-risk investment because of high possibility of payment. There could be a situation wherein the government could enter into insolvency where debts will never be paid. But this is a very remote possibility because of the supernational groups and other organizations such as the IMF steps up to prevent this economic disaster. As already indicated, Greece was prevented from insolvency because they received help from the European Union.
Implicit Debts
The classification of national debt refers only to internal and external debt. However, there is another form of debt the government accrues that is never accounted. Called the implicit debt, this is a type of internal debt where the government acquires funds from individuals with the promise of repayment on the appointed date. A good example of implicit debt is pension. Individuals deposit money for their retirement and they are used by the government for various purposes. When the individual reaches 60 years old, they could ask for a “repayment” in form of pension benefits. Because the government acquires funds from individuals with promise of repayment once they retire, the government accrues debt over time.
Because it’s an implicit debt, some consider it as a ticking time bomb because of some factors. Among them is the increasing number of retirees because of the generation of baby boomers have started retiring. The demand for pension will rise and paying the retirees on time and provision of sufficient support such as health care could be a problem. Some say they should be considered as part of the national debt so that the government could deal with the problem as soon as possible or at least funds could be accumulated through bonds and treasury bills.
How National Debt Affects Consumers
National debt can have an effect on average consumers in many ways. Among them is the increased tax rate as the government has to accumulate more funds to pay for the debt. This can easily affect the source of income of consumers since an increased percentage of their earnings will go to taxes instead of paying for bills and other conveniences. Another effect of an increasing national debt is the limitation of services. Although there will be an increased tax rate, the expected services that goes with the increased support for the government through taxes may not come. Since the government is under debt, it will use most of the taxpayer’s money for paying the said debt. This means funding is still limited on certain services.
National Debt, Investment and Security
The national debt could also have an effect on businesses. A country that has a large debt could be viewed as a risky place for investment. It even has a hand in national security as a country with a large debt slowly loses its economic appeal and power. For this reason, some consider national debt as a tangible measurement of national security.
National debt in itself is a not a bad concept since the acquired funds could be used for additional services. However, the national debt could cause some problems if they continue to rise and no effort is made to control its increase.