Is debt as a high % of GDP a problem?

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  • Created by: becca_mp
  • Created on: 12-04-17 15:36
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  • Is debt as a high % of GDP a problem?
    • YES:
      • Higher interest rates
        • higher payments
        • raises interest rates across the economy
          • Households: increase savings, decrease consumptionFirms: decrease investment, REDUCES ECONOMIC ACTIVITY
      • Inter - generation fairness
        • future generations will pay for current generations borrowing
      • interest payments
        • opportunity cost
        • higher taxes or lower government spending
          • REDUCES ECONOMIC ACTIVITY
      • transfer payments
        • no current output
        • from taxpayers to holders of the debt
    • NO:
      • transfer payment:
        • if government owes the money to UK citizens
      • interest rates are currently very low
        • government can borrow at 2%
          • use for investment --> future growth --> increase in tax revenue to reduce future debt
    • DEPENDS ON:
      • can we grow GDP faster than we grow debt - if so debt as a % of GDP falls
      • confidence of lenders that the government will pay back the money
        • if they think that the risk is higher, they will want higher interest rates

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