The national debts of countries in the EU increased on average from 62.2% to 84.8% of
GDP between 2008 and 2016. To what extent might the rise in the national debt of an EU
country be a cause for concern? (15)
High national debt implies that it will cost higher interest payments for the future
generations. Future government will have to increase spending on the interest payments,
resulting in a leakage from the circular flow of income with the addition of negative
multiplier effect, future real GDP is likely to remain low and it will be more difficult for the
future generation to obtain higher economic growth. Also, the future government will have
less money available for spending on public and merit goods and services, resulting in lower
standards of living for future generations. In Greece, its total government debt is €316bn,
which is equivalent to around 180% of its GDP in 2018. Most of it is now owed to other
Eurozone governments, rather than the private markets, and is repayable over many
decades. This implies that there will be continuous leakage from its circular flow of income
for the coming decades through government spending for its interest payments of its
national debt.
However, high national debt resulted from public borrowing may be spent on present use of
public goods and services such as infrastructures and public transports which shows long
term benefits and therefore may help boost economic growth in the future. Also, inflation
may erode the real value of debt, thus the interest payments in the future may actually be
lower in real term.
When the national debt of a country becomes too large, other countries may start to lose
confidence in the it, thus will be reluctant to borrow and this country will eventually have to
seek help from the IMF which often lend with strict conditions. For example, the Greek
government had to follow a three-year bailout plan from May 2010, in order to receive €110
billion in loans from European countries and the IMF. The retrenchment included tax
increases, reduced pensions, public sector wage cuts and looser regulations to restore
competitiveness and growth.
The extent to how rise in national debt of an EU country may be a cause for concern also
depends on who hold the debts. In the case for Greece, it is concerning as debts are held by
other countries and the IMF so there will be a long-term leakage in the circular flow of
income. However, for the UK, 40% of its national debt is held by the Bank of England, thus
there will not be a leakage from the circular flow of income as the interest payments by the
government will eventually go back to the circular flow through the addition of aggregate
demand.
GDP between 2008 and 2016. To what extent might the rise in the national debt of an EU
country be a cause for concern? (15)
High national debt implies that it will cost higher interest payments for the future
generations. Future government will have to increase spending on the interest payments,
resulting in a leakage from the circular flow of income with the addition of negative
multiplier effect, future real GDP is likely to remain low and it will be more difficult for the
future generation to obtain higher economic growth. Also, the future government will have
less money available for spending on public and merit goods and services, resulting in lower
standards of living for future generations. In Greece, its total government debt is €316bn,
which is equivalent to around 180% of its GDP in 2018. Most of it is now owed to other
Eurozone governments, rather than the private markets, and is repayable over many
decades. This implies that there will be continuous leakage from its circular flow of income
for the coming decades through government spending for its interest payments of its
national debt.
However, high national debt resulted from public borrowing may be spent on present use of
public goods and services such as infrastructures and public transports which shows long
term benefits and therefore may help boost economic growth in the future. Also, inflation
may erode the real value of debt, thus the interest payments in the future may actually be
lower in real term.
When the national debt of a country becomes too large, other countries may start to lose
confidence in the it, thus will be reluctant to borrow and this country will eventually have to
seek help from the IMF which often lend with strict conditions. For example, the Greek
government had to follow a three-year bailout plan from May 2010, in order to receive €110
billion in loans from European countries and the IMF. The retrenchment included tax
increases, reduced pensions, public sector wage cuts and looser regulations to restore
competitiveness and growth.
The extent to how rise in national debt of an EU country may be a cause for concern also
depends on who hold the debts. In the case for Greece, it is concerning as debts are held by
other countries and the IMF so there will be a long-term leakage in the circular flow of
income. However, for the UK, 40% of its national debt is held by the Bank of England, thus
there will not be a leakage from the circular flow of income as the interest payments by the
government will eventually go back to the circular flow through the addition of aggregate
demand.
