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National Debt

  National Debt is the total outstanding debt of a country\'s government (usually defined to include local as well as central government). Economists have long pondered whether the national debt is a ‘burden’, and if so whose burden it is. The consensus opinion is that debt due to foreign creditors is burdensome, because it has to be serviced and repaid out of a country\'s foreign exchange earnings (themselves a sacrifice, because exports are produced but not consumed). But debt owed to domestic creditors is not a burden for the country as a whole.

Most economists, for example, have not considered the US national debt a major problem until recent years. It was internally held that, as a nation, the citizens owed it to themselves. To pay off the debt to themselves they would tax themselves, so that it should be ‘out of one pocket and into the other’ for the nation as a whole. At times of repayment there might be a redistribution of income if different people were taxed than held the debt instruments, but there was no ‘generation’ problem of having future generations pay for current public expenditures. The sacrifice is current, it was argued; it is not passed on. At the time of the deficit people give up private goods for public goods if there is full employment. If there is not, there is no current generation sacrifice either.

Another problem arises when interest on the debt is large as a percentage of the annual budget: it becomes much more difficult to reduce the budget deficit because the interest comes off the top and cannot be reduced by simple legislative action to reduce the appropriation, as is a possibility for (say) highways and national defence. Furthermore, if the deficit is large going into a recession, as it was in 1991, fiscal policy is stymied as politicians fear to pass spending legislation that would increase output and employment but would also make the deficit even larger. TF

See also deficit spending.



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