Effect+of+Government+Debt+on+the+Economy


 * Effect of Government Debt on the Economy**

  Less money available in the future  When the government borrows money to pay for other expenses, interest must be paid on the amount borrowed. As a result the money that would have been used for the provision of services to the citizens is spent on paying interest and that means cutting back on some essential services to its citizens. To pay interest on the debt, the government has to raise taxes in order to generate income. When taxes are raised, it will cause a decrease in the ability of consumers to spend because consumers have less disposable income. So when the money that is supposed to be used for provision o services and other government spending is used to pay debt and interest on high debt, it will result in less money to be spent by either the government or individuals in the future.  High interest rate on our debt  When a nation’s foreign debt is high and the credit rating is low, the government will be forced to pay high interest rate if it must borrow. An example is a country like Greece which has to pay 12.7% on a 10yrs note because of its high foreign debt and low credit rating. For the country to continue to borrow, it must comply with foreign lenders by paying a higher interest. As a result, it will mean high interest rate for the citizens which will decrease the ability to borrow.  Low economic growth  For the government to be able to meet the obligation of servicing it high interest debt, it will be compelled to increase interest rate on borrowing by its citizens, which results in the inability for both individuals and corporations to borrow. When there is a decrease in investment spending as a result of high interest because of the inability to borrow, it will result in unemployment, decrease in taxes to the government which means decrease in government spending, and low consumption spending which will mean a low decrease in GDP, and subsequent, low economic growth.  Printing money by the government  Many countries have to resort to printing money because no one will like to buy their bonds or lend them money, and they cannot afford the interest on their debt. When government prints more without checks on its spending, this can generate a high inflation; high inflation is bad for a country because it decrease the purchasing power of the citizens and the government. When the government makes more money available than the goods and services, it causes inflation, and if it continue for a long time, may cause hyperinflation which is bad for a country.  And when taxes are imposed on people, they resort to riots and public disturbance.  The website below is an example of demonsrations by Greece of the rising debt and and inflation because people are not happy when taxes are imposed on them.  []  . 
 * LESS MONEY AVAILABLE IN THE FUTURE**