The Effect of Increases in Public Borrowing
Global public borrowing has been increasing around the world. With an ageing population in many countries and the hangover of COVID-19, many Governments are taking on more debt to support their economies and healthcare systems.
So, with public borrowing at a record high and experts predicting a continuing trend, it is important to understand the implications.
Higher Interest Rates
Often, Governments borrow money by issuing bonds. These bonds are sold to investors, who receive a return on their investment through interest payments. As the amount of public borrowing increases, there is more demand for these bonds, which, in turn, drives up interest rates.
When a Government has a large amount of debt, investors may start to worry about the Government’s ability to repay that debt. This can lead to decreased economic confidence, making nervous investors sell off their assets. If enough investors do this, it could trigger a recession.
To pay back the debt, Governments may have to increase taxes. This can be a burden on taxpayers, particularly those on lower incomes. In addition, higher taxes can discourage investment which can stall economic growth.
Reduced Public Spending
When a Government focuses on repaying debt, less money is available for essential programmes like healthcare, education, and infrastructure. Large-scale projects can be delayed or shelved, which has a knock-on effect on the industries and employment sectors.
If the public becomes concerned about the amount of debt their Government takes on, there may be increased pressure on politicians to act. This can lead to political uncertainty and change, further impacting the economy.
Governments need to borrow to support their economies, but it is clear that the effect of their spending has wide-reaching consequences on society. This impacts the credit and debt businesses we work in and the customers we support. Stay informed about the trends and be prepared before the implications take effect.