Can someone explain how national debt effects the lives of normal people? It seems like almost every developed western nation runs massive billion dollar deficits every year, and that seems to be totally fine. Nothing bad ever seems to happen. Occasionally you hear old school conservatives saying we need to balance the budget, but why should we if every country is in debt with seemingly no negative effects?
In: Economics
Politicians love to equate Government finance to personal finance scaring people into believe that any kind of debt is bad and that the government has out of control spending, when in reality operating the Government has far more in common with corporate finance that personal. Corporations and Governments operate in debt all the time and it’s perfectly normal and healthy. The catch is making sure that debt is sustainable.
In the case of Governments money should be borrowed during times of economic recession. It may seems counter intuitive but government spending and borrowing helps drive the economy which in turns gets you out of the recession. Government cut backs and austerity actually make the economy worse.
But that debt has to be paid back. If it’s allowed to grow out of control eventually it could cause an economic collapse, but that is doom and gloom scenario.
Politically speaking more often than not austerity and lowering government spending has more to do with lowering taxes than actually reducing the deficit. While increasing the debt (politically speaking) is about not having to raise taxes and making the politicians unpopular.
The average person isn’t really affected by government debt in the same way as increased taxes, which is why the government borrows so much.
For the average person government debt doesn’t affect your directly, only indirectly.
If you have a retirement plan or a pension there is a very good chance that much of that money is invested in Government bonds, which is loaning the government money. This is generally considered a very safe investment because the government is highly unlikely to default on the debt and pays decent interest rates. Worldwide retirement and pension funds actually rely very heavily on government debt to work.
Another factor is that debt keeps your taxes low. One of the main reasons to borrow money is to pay for government programs, infrastructure, and wars without raising taxes.
A percentage of your tax dollars is used to pay back debt though, so it’s give and take.
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