Can you explain like I’m five, what is the national debt, how does it exist, where does the money come from or go?
Do we just pay monthly on it, because God knows if I was to not pay on my debt, someone would hold me accountable….
Thanks.
In: Economics
Imagine a government wants to build a road, and it knows that the road will make journey times faster and so improve work productivity increasing income and tax income. They could wait until they have enough money to build the road next year, or they could borrow money to build the road today, and get extra tax next year to pay off the debt. They want to make voters happy so they build the road today.
Next year they want to build a new airport, and the same logic applies. They could wait, they could pay off the old loan and ask to borrow some new money to pay for the airport, or they could ring up the person who gave them the original loan and ask to delay repayment for a year (at the price of extra interest).
Functionally the latter two options are the same, the government always has more things it wants to do with money it doesn’t have, and so borrows money on a continuous basis. The sum total of money borrowed at any given moment is the national debt. Some of it is being paid back and new money borrowed, some of it just trundles along with the government making the minimum interest payments.
The key thing is that the government thinks it will last forever, so it is not motivated to pay down the national debt to zero. It’s a bit like the difference between a homeowner taking out a 25 year mortgage vs a buy-to-let landlord taking out an interest only mortgage. So long as the economy keeps growing and so the government’s tax income keeps growing it should be able to keep making the payments. This is why debt is often quoted as a percentage of GDP; it shows how the debt is growing in proportion to the economy.
Latest Answers