It is known to all that government main revenue comes from taxation. But in fact, there are many ways that the government can earn more money to stimulate the economy or to improve the welfare of the country. The government can create more money by printing more of it. This can expands the economy but also result in inflation (not always). Another alternative way is to borrow more money. If government spending exceeds taxes revenues then there is a deficit that can be financed by borrowing money from both within the country and from overseas. This loan is called “Public debt”.
Public debt, which is also sometimes referred to as government debt or national debt, is the debt owed by a central government. It is an indicator of how much government spending is financed by borrowing instead of taxation. There are two main type of debt: Internal debt and External debt. Internal debt is the debt owed by the government to lenders based in the same country while external debt is the debt owed by foreign lenders. We can separate the purposes of creating public debt into five reasons:
1. The government suffers a loss in trade balance and still has a high spending. So they have to borrow more money due to limited sources of government income.
2. The government is having a problem with the failure of collecting its revenue. This means that the government has more expenditure than the revenue.
3. The government borrows to invest in economic development and social infrastructure.
4. The government needs to borrow in an emergency cases where the country is facing a specific situation that have increased spending at a high level in a short period of time such as the occurrence of natural disasters, war or violence.
5. The government borrows in o...
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...been invested in productive projects or assets, such as education or improving schools which creates human capital in the future, building or repairing infrastructure like roads and highways or any other projects that yield a rate of return greater than the cost of the debt. So in this case, the government debt does not put cost on future generations whether the government borrows from within the country or from overseas.
On the contrary, if the government spends the money on consumption for the present generation to consume now. This will definitely put cost on the future generations. To make it easier to understand, if someone ask to borrow your money to buy ice-cream cone and he or she eat it all –all gone. You did not get anything in return and you also have to save more money or to earn money to substitute that money that your friend owed you. Is that fair? No.
First, the budget deficit. It’s basically the idea that the government spending is greater that its earning. They are two ways to manage this deficit, either to cut spending (Medicare, Medicaid and social security etc.) or increase taxes. However, each solution has its disadvantages. If the government increased taxes, people will spend less money and if they cut spending, people will complain about it arguing that this may hurt the nation.
Sovereign debt theories first must assume the premise that there is no third party enforcers and that lenders must be able to enforce claims on their own. In addition these theories use reputation arising through repeated interaction to generate equilibria. It is only then that lending agreements are made and self-enforcing. Bulow and Rogoff (1989b) show that no lending will occur if the only threat is to cut off future lending. This is because merely the threat to withdraw credit is not a severe enough penalty to prevent the Crown from repudiating his debt. Lenders would then anticipate this, and consequently, they do not lend.
When you get to the point where debt becomes too much you begin to search for a way out. There are many different options to get rid of their debt; one option is the debt snowball. This debt relief option sounds more unusual than it really is.
The national debt of the United States is calculated using the worth of the Treasury securities that have been distributed by the Treasury and other bureaus of the federal government. Debt held by the public consists of debt held by persons, businesses, the Federal Reserve System, and foreign, state, and local governments. Debt that is held by the government consists of trading securities that are held in accounts managed by the federal government. Examples of debt held by the government are funds owed to program beneficiaries, such as the Social Security Trust Fund.
As of today America’s national debt is 18 trillion dollars and approximately 5 trillion of that is held by foreign countries including China and Japan. In the last few years we seem to hear more about balancing the country’s budget and politicians raising the debt ceiling so we can pay on this debt. How have we gotten into such an overwhelming and complicated problem with our nation’s money? Ironically the same can be said for our individual household debt as well as making the same mistakes and trying to find creative ways to be accountable to our financial responsibilities. Teaching the basics of personal finance n our schools can culturally change our financial practices, leading to a more financially literate public and a stronger, more stable, America. If the younger generations can become more financially savvy, then there is an opportunity for our nation as a whole to become less dependent on debt to survive.
Every day in New York City, hundreds of people walk past a huge digital billboard with giant numbers across its face. Each person who walks past this billboard sees a slightly different arrangement of numbers, growing larger every second. This board is the National Debt Clock, representing the over 14 trillion dollars currently owed by the United States. While some people claim that the national debt is caused by the falling economy, most maintain that the debt itself causes the poor economy (Budget Deficits 2007). Rising debt leads to higher interest and investment rates, and cuts into our national savings. Ignoring the national debt leaves the major burden of paying it off to later generations, while meanwhile allowing our country’s economy to further drop and our dependency on other nations to rise.
Deficit spending happens when a government grows its debt, meaning that its spending is greater than its income. (Deficit Spending, 2008) Deficit spending is a fiscal policy, that when used appropriately can do some amazing things, like pull the United States up from its bootstraps effectively ending The Great Depression. President Hoover increased government spending by 50% and used the money to fund public works and infrastructure projects from 1928 to 1932. (Deficit Spending, 2008)
The government’s revenue comes from taxes. When the economy is doing well, the money keeps moving within the economy. The more transactions within the economy, the more revenue the government can make. This is the case with sales taxes and other trade and commerce related taxes. The government also takes in much of its revenue from property taxes. If the economy is doing well it is likely that more citizens will own property instead of rent. When the economy is not doing well, the money stops moving and the government may not collect as many taxes.
The use of taxes is one of the government's favorite ways to make its presence known in the economy. While this method seems blatantly obvious, many of the ways the government uses the money collected by taxation is not. Some of the money it takes is used to fund other programs designed to "protect" consumers and to "create" jobs. Be...
Historically, financial crises have been followed by a wave of governments defaulting on their debt obligations. The global economic history has experienced sovereign debt crisis such as in Latin America during the 80s, in Russia at the end of the 90s and in Argentina in the beginning of the 00s. The European debt crisis is the most significant of its kind that the economic world was seen started from 2010. Financial crises tend to lead to, or exacerbate, sharp economic downturns, low government revenues, widening government deficits, and high levels of debt, pushing many governments into default. Greece is currently facing such a sovereign debt crisis and Europe’s most indebted country despite its surplus in the early 2000s. Greece accumulated high levels of debt during the decade before the crisis, when the capital markets were highly liquid. As the crisis has unfolded, and capital markets have become more illiquid, Greece may no longer be able to roll over its maturing debt obligations. Investment by both the private and the public sectors has ground to a halt. Public sector debt has increased substantially as the state had to rely on official assistance to payroll expenses, fiscal deficit and fund social payments.
When governments increase their spending, crowding out can occur – government spending reduces available funds and increases the cost of capital, leading...
An increase in government spending or a reduction in net taxes is always aimed at increasing aggregate output (Y). The main aim is to stimulate the economy but this may lead to many problem such as inflations, budget deficit because of needed debt to finance the deficit. Before finding out which is the better options for stimulation of any economy we need to first be clear with the concept of multiplier.
The other method is Deflationary fiscal policy this involves decreasing AD therefore the government will cut their spending and or increase taxes. Higher taxes will reduce consumer spending. This will lead to an improvement in the government’s budget deficit.
The government use of taxes plays a crucial role in today’s economy as well as personal finances, it has and will continue to leave its mark on the world we live in.
There are different factors that lead to debt crises, like Oil shock prices, which is when a price increase, then every single price for the product will increase. Everything depends on oil, the economy will not work well without petrol which is oil, for example shipments and transportation. If there was no shipments and no transportation then there will also be no exports and no import, which will also lead to no profit and that will cause debt crisis. Another factors that leads to debt crisis is interest rate developments, aggressive bank lending, mismanagement or corruption in LDC’s, like poor citizens in the country and the president owns the money to himself. There is also another f...