Who does the government borrow money off to get credit to increase spending? And why is it seen as so bad for the government to increase its debt? I guess the main thing that I want to know is who holds a government accountable for their debt and what will happen if a government just continues to borrow and increase their debt?
In: Economics
It borrows from savers and investors. Anyone can loan money to the government by buying bonds.
It isn’t seen as “bad”. Only non-economist wacky theorists out there think so. Some level of government debt is necessary. How good or how bad depends on what policy options the government adopts when spending the money.
In a democracry, the electorate determines it, in the long run. Want more welfare, a bigger army, medical treatment for the poor, social security etc. These are all government spending. The people vote for the leadership that best reflects their desires.
Governments, at least developed ones with a sense of good stewardship, will balance long term and short term needs, monitor the health of the economy and borrow as needed. As long as the borrowing is not too far out of line (and this is a big debate) with the size of the economy, it is generally a necessary thing. If it borrows too much and people feel that the economy and money is at risk of devaluing, then interest rates will rise accordingly. This can also lead to inflation.
>Who does the government borrow money off to get credit to increase spending?
Anyone willing to lend it to them. A lot of countries sell bonds which are sold at a discount to the face value (like ‘buying’ a $10 bill for $9) and also collect interest. These have a set maturity date.
This is pretty popular because its about as safe of an investment as you can make. Its even safer than simply keeping cash in a safe since it accounts for inflation.
> And why is it seen as so bad for the government to increase its debt?
There’s some risk in borrowing and lending. People occasionally don’t pay back their debts. But a sovereign country is generally a safe bet though it does happen.
> who holds a government accountable for their debt and what will happen if a government just continues to borrow and increase their debt?
whoever lent them the money. If borrowing from a country is seen as risk then interest rates might be higher to induce more people to take a chance. Taxes may go up and spending gets cut if that happens and people want better reassurance that they aren’t going to lose money. So its a balance to figure out the benefits of borrowing now (you can’t pay wages for workers on promises but those workers do important work) without overextending yourself.
Government debt is to its citizens, investors ,and some foreign governments through “bonds” – kind of like a savings account but a set interest and time you can get it back. The government buys or sells more or less of these bonds to cover the expenses they have.
Why or whether it is bad is a bigger question! Think of your life – if you have a bunch of credit card debt from going on vacation to New Zealand, that is debt you have to pay off and which you get no long-term benefits from (despite the fun you had in NZ). You now have debt of $10,000. But also, think about the house you bought. You have debt of $300,000, but you also have an asset worth (presumably) $300,000 to $400,000, so that mortgage might be what some people call “good debt” compared to your “bad debt” on your credit card.
Government debt isn’t readily comparable as good debt or bad debt when we look at the raw numbers. Some government spending is like a NZ vacation, some of it is like an asset purchase, some of it is like an investment that will get money back later. It is bad for government debt to increase on those “vacation spending” types of things (corporate bailouts, money for special interest groups, high spending on wars, etc), but good on assets (public lands for parks/forests, investments like food stamps/medicaid (which reduce the cost to care for those people later)). The only way we can really know what is good and bad debt of the government is to look closer at the bills and laws passed that spend that money.
> Who does the government borrow money off to get credit to increase spending?
Ever hear of government bonds? That is a loan that you make to the government with a repayment time frame (5 – 10years).
> And why is it seen as so bad for the government to increase its debt
It’s pure politics. Government debt is incredibly complex. It’s more like a mortgage than credit card debt.
Further, governments never need to pay off debt because governments don’t have a lifetime. They can carry debt forever.
> I guess the main thing that I want to know is who holds a government accountable for their debt
Elected officials. Budget Hawks. People calling for less spending etc.
>and what will happen if a government just continues to borrow and increase their debt?
Depends.
In the case of Greece, bad things.
In the case of the US. Probably nothing. The US national debt is a big number. 24Trillion: [https://www.investopedia.com/updates/usa-national-debt/#:~:text=The%20national%20debt%20level%20of%20the%20United%20States%20(or%20any,%2424.22%20trillion%20in%20April%202020.](https://www.investopedia.com/updates/usa-national-debt/#:~:text=The%20national%20debt%20level%20of%20the%20United%20States%20(or%20any,%2424.22%20trillion%20in%20April%202020.)
BUT the US’ GDP (i.e. income) is 21.44 trillion.
You might think that that’s bad. The Debt is higher than the GDP, they owe more than they make etc etc.
Well the average mortgage in the US is 200K. The average family income is 60K. That’s a way worse ratio than the US debt.
Government debt isn’t always bad. It can be. But sometimes you need it.
You’ve heard of a budget deficit? This is where all of the governemnt income (income, corporate tax, trade tariffs, sales tax) is less than its exependitures. But, 1) a government doesn’t get its income in a steady stream, its in bursts – tax deadlines etc. 2) you make your budget based on what you think you need to spend, but emergencies happen. This covid-19 thing for example. Suddenly you’re spending way more than your budget had allowed.
So you borrow – this comes in the form of government bonds. Frankly, if the government can’t be trusted to pay back its debts we’re in big trouble. They don’t offer lots of interest, but its pretty safe. So risk-averse investors will go for the few % points they get.
Who buys em? You can. Your bank can. Your mutual fund can. Companies can. Other countries can. Why this vs. other investments? its safe and the growth is known. Lets say you’re a company and you know 5 years from now you need to build a brand new factory. In the bank your money is only making 3%. If you buy 5 year government bonds, you’ll make 7%, and its about as safe.
And if a country continues to borrow, but never pay back their debts? That’s a default – remember what happened to Greece? Greece owed lots of debt to other European countries. Instead of cutting government spending or raising taxes to pay back their debts, they simply took on more debt. Eventually they couldn’t even pay the interest on their existing debts.
So the other countries like Germany said “Ok, thats it! No more loans. Cut your spending, raise taxes don’t waste your money. Pay us x amount and THEN we’ll see about MAYBE lending you more money.”
The government borrows money by issuing bonds. Investors buy these bonds because they’re considered safe investments, and in doing so, lend money to the government. The government then pays them back in the future with interest.
It can be bad because that money that they spend on interest eats up more of their future budget. However, in theory, whatever the government spends their borrowed money on should increase tax revenue in the future enough to outweigh the interest. In practice, this isn’t always the case, which is why the deficit keeps growing every year.
Where to they “get it”? That’s easy –
governments “get debt” when they have to borrow money to pay their bills, just like a person using a credit card to buy something when they don’t have the cash on them when they want to make a purchase. Governments sell bonds and can directly borrow money from institutions and even other governments. Similar how a person can buy a car on credit or get a car loan.
Why is it bad? That’s trickier. If you are a person who got a new job, but needs a car to get to work….then going into debt to buy the needed car isn’t BAD – it allows you do work, in he hopes you can pay the loan off later and still come out ahead in the long run.
But governments have a nasty habit of letting their debt grown and grow and grow to levels where they might even have trouble paying the interest on the loan AND pay their current bills….without borrowing more money to do it.
This had lead the collapse of the economy in more than a few countries in history…..and has even contributed to the fall of the governments of some countries. Of course many people at the time didn’t think it was possible….and some still have similar thoughts today….
So….debt in and of itself isn’t bad…..it’s **how** you manage your debt, as a person or a country (government).
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