Public debt: Difference between revisions

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A country's [[national debt]] - also known as its public debt - is a matter of economic and political significance. It has often been the subject of controversy,  and some  have considered it to have moral significance.
:''(terms shown in italics in this article are defined in the glossary on the [[/Related Articles|Related Articles subpage]])''
==Definition==
The OECD's broad definition of public debt as "the external obligations of the government and public sector "<ref>[http://stats.oecd.org/glossary/detail.asp?ID=2193. ''Public Debt'', OECD Glossary of Statistical Terms]</ref> is in general use, but national definitions <ref>For the US definition ses the Treasury Department guide [http://www.ustreas.gov/education/faq/markets/national-debt.shtml].<br>For the UK definition, see the ONS guide [http://www.statistics.gov.uk/downloads/theme_other/GSSMethodology_No_12_v2.pdfd]</ref> differ in detail <ref>[http://www.economicshelp.org/blog/uk-economy/understanding-government-debt-statistics/, ''Understanding Government Debt Statistics'', Economicshelp.org]</ref>and produce figures that may not be comparable. The European Union's definition embodied in its ''Stability and Growth Pact''<ref>[http://stats.oecd.org/glossary/detail.asp?ID=3066 ''Stability and Growth Pact'', OECD Glossary of Statistical Terms]</ref> of "General Government Gross Debt"<ref>[http://stats.oecd.org/glossary/detail.asp?ID=3066 ''General Government Gross Debt (Maastricht Definition)'', OECD Glossary of Statistical Terms]</ref> differs  in detail from the complete OECD definition.
==Overview==
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It is customary for governments to use borrowing to finance investment, and it is current practice for the main industrialised countries to allow national debt to  accumulate to between 40 and 60 per cent of GDP (except  Japan and Italy, with
percentages of over 100). However, it is generally considered to be prudent to avoid excessive debt in normal times, in order to be able to cope with emergencies such as wars and recessions.  It is also normal practice for governments to allow national debt to rise to between  70 to 100 per cent of GDP during major recessions - as a result, mainly of the operation of their economies' ''automatic stabilisers'', but also from the use of ''fiscal stimuluses'', intended  to compensate for reductions in private sector spending.
Such policies are not uncontroversial, however, and even relatively modest levels of national debt, amounting to no more than 50 per cent of GDP, commonly meet with expressions of concern as being  "unhealthy" or even dangerous. Such popular concern may be  attributable  to an instinctive belief that saving is virtuous and borrowing is discreditable, or to the belief that it imposes unfair burdens on future generations, or to the once universal reverence for balanced budgets -  but it is also  attributable to rational fears of  harmful economic consequences. Public choice theorists oppose government expenditure, even for the purposes of investment, on the grounds that the politicians concerned are mainly motivated by personal gain, rather than a desire to serve the public interest. Austrian School economists argue that fiscal stimulus expenditure is ineffective, partly  because of the "''Ricardian equivalence''" argument that it is nullified by increases in private sector saving and partly out of scepticism about the ability of politicians to manage the economy. Other economists have demonstrated that the  use of deficit financing is bound, if continued long enough, to lead to a "''debt trap''" from which a government cannot escape except by defaulting on its obligations or by expanding the [[money supply]].  The 1931 German hyper-inflation, which was caused by the use of "''monetisation''" to manage high levels of postwar debt, has come to be seen as  a  dramatic warning of the dangers of deficit financing , and sovereign defaults such as  the 1998 default by the Russian government as a reminder that governments are not immune from the dangers of insolvency. ''Sovereign default '' among developing countries is not, in fact,  uncommon,  and although the danger that it it could happen to a major industrialised country is generally considered to be remote,  there is fear that a persistent rumour of its possibility might alarm investors to the point of making it self-fulfilling.
==The history of national debt==
===The British experience===
In the 18th century and before, it had been the practice of kings to finance their wars by borrowing. It was cheaper than collecting taxes - and it was risk-free because a king could not be called to account for defaulting on his obligation to repay - and  "sovereign default" was a frequent occurrence. In England, however, Charles II's "Stop of Exchequer"<ref>[http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1075&context=ucsbecon Der-Yuan Yang: ''The Origin of the Bank of England: A Credible Commitment to Sovereign Debt'', Department of Economics,  Working Paper 198, University of California, Santa Barbara]</ref> of 1672 was the last time it happened, because the "Glorious Revolution" of 1688 was followed by the "Financial Revolution"<ref>[http://www.litencyc.com/php/stopics.php?rec=true&UID=388 Colin Nicholson: ''Financial Revolution (1688-1750)'', The Literary Encyclopedia, 2001]</ref> during which Parliament assumed effective control over the national debt. The culmination of that revolution was the creation in 1749 of the "Consolidated Fund" <ref> The Consolidated Fund Bill provides Parliamentary authority for funds requested by the Government, and has been placed before Parliament every year since 1749 </ref>, and the issue of undated bonds known as "consols". Members of Parliament were concerned from the start to reduce the level of national debt, as evidenced by the passage of the National Debt Reduction Act 1786 <ref>[http://www.opsi.gov.uk/RevisedStatutes/Acts/apgb/1786/capgb_17860031_en_1 ''National Debt Reduction Act 1786'', UK Statute Law Database]</ref>. Their intentions were frustrated, however by the need to finance Britain's part in the Napoleonic War, and  between 1743 and 1815, Britain's national debt increased from £245 million to £745 million, which was twice its national income<ref>Niall Ferguson: ''The Ascent of Money'', Allen Lane, 2008</ref>.  A further attempt signalled by a second debt reduction act <ref>[http://www.opsi.gov.uk/RevisedStatutes/Acts/ukpga/1866/cukpga_18660011_en_1 ''National Debt Reduction Act 1866'', UK Statute Law Database]</ref> was more successful and the ratio of national debt to national income was reduced to less than 50 per cent by 1900. But further two wars and the intervening [[Great Depression]] raised it again to over 100 per cent.  According to researchers at the Institute of Fiscal Studies <ref>[http://www.ifs.org.uk/bns/bn26.pdf Tom Clark and Andrew Dilnot ''Measuring the UK Fiscal Stance since the Second World War'', Fig 3, page 5, Institute of Fiscal Studies,2002]</ref>, it rose to over 150 per cent during the first world war, remained at above that percentage for most of the years between then and 1955. After then it was reduced steadily to about 50 per cent by 1975, and remained at between 45 and 55 per cent between 1975 and 1990 and between 35 and 55 percent through the 1990s.
===The United States national debt===
In 1783, the United States Congress was given the power to raise taxes, but in 1785, it was found that tax revenues were insufficient to meet the government's expenses and Alexander Hamilton argued the case for the raising of public, arguing that "A national debt, if it is not excessive,will be to us a national blessing." In  1789, Congress established The Treasury Department, naming Alexander Hamilton, as its Secretary, in 1790 it passed the first Funding Act, and by February 1792, interest-bearing government bonds were on sale and the national debt rose to $77 million about 25 per cent of national income. However, a strong preference for freedom from debt and the maintenance of a "balanced budget" was evident from the beginning, and in a 1793 message to the House of Representatives, George Washington advised them that &nbsp;"No pecuniary consideration is more urgent than the regular redemption and discharge of the public debt: on none can delay be more injurious, or an economy of the time more valuable."&nbsp;, and in 1799 Thomas Jefferson wrote: "I am for a government rigorously frugal & simple, applying all the possible savings of the public revenue to the discharge of the national debt." <ref>Thomas Jefferson's Letter to Elbridge Gerry of 26 January 1799, quoted in  Noble  Cunningham: ''Jefferson vs. Hamilton: Confrontations that Shaped a Nation'', Palgrave Macmillan, 2000 [http://books.google.co.uk/books?id=tQZn3VlFSyAC]</ref>. Jefferson's Secretary of the Treasury, reduce the public debt to $45 million by 1811, and by 1835 the national debt had been fully repaid. Following the war with Mexico, the national debt rose again to $65 million, and it reached $2.7 billion, or about 30 per cent of national income, by  the end of the Civil War. By the beginning of the First World War it had been reduced again to about 10 per cent of national income but rose again to 30 percent during that war, and to $260 billion, or about  120 percent in the course of the Second World War. It was reduced to below 40 per cent in the 1960s but had risen to over 60 per cent by 1982  and  by the end of  2008, it had reached $10.3 trillion, or about 60 per cent of GDP. <ref> Sources [http://www.publicdebt.treas.gov/history/history.htm ''The United States Bureau of the Public Debt''] and [http://www.optimist123.com/optimist/2005/01/national_debt_b.html ''National Debt Burden: Full History'', The Sceptical Optimist, 2009]</ref>
==Economic consequences==
==Economic consequences==
===Sustainability===
===Sustainability===
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<ref> The economics of "crowding-out" are explained on page 56 of  Frederic Fourie: ''How to Think and Reason in Macroeconomics''. JUTA 2001, and on page 246 of William Baumol and Alan Blinder: ''Economics, Principles and Policy'', Harcourt, Brace Jovanovich 1979 </ref>
<ref> The economics of "crowding-out" are explained on page 56 of  Frederic Fourie: ''How to Think and Reason in Macroeconomics''. JUTA 2001, and on page 246 of William Baumol and Alan Blinder: ''Economics, Principles and Policy'', Harcourt, Brace Jovanovich 1979 </ref>
==Political attitudes==
==Debt- limiting rules==
==References==
<references/>

Revision as of 03:40, 13 April 2009

Economic consequences

Sustainability

[1]

Intergenerational consequences

[2]

  1. ↑ The algebra of the debt trap is examined on the addendum subpage and at page 315 of Frederic Fourie: How to Think and Reason in Macroeconomics. JUTA 2001
  2. ↑ The economics of "crowding-out" are explained on page 56 of Frederic Fourie: How to Think and Reason in Macroeconomics. JUTA 2001, and on page 246 of William Baumol and Alan Blinder: Economics, Principles and Policy, Harcourt, Brace Jovanovich 1979
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