What could be the potential consequences of the steadily perennially growing indebtedness of the state's public finance system, including the steadily growing budget deficit and public debt both in relative, indicator terms expressed against the Gross Domestic Product and in terms of absolute numbers expressed in money?
As the indebtedness of the state's public finance system has increased in many countries in recent years, it is increasingly important to consider what categories of risks this may lead to. The increase in the indebtedness of the system of state public finances has occurred mainly in connection with, on the one hand, objective factors such as the occurrence of financial and economic crises that are difficult to predict in advance, and, on the other hand, is the result of misguided economic policies, mistakes made in the framework of the management of the system of state public finances, the formation of the central budgets of the state and/or the financial budgets of local government units, the budgets of state public institutions, etc. Mistakes made in the framework of the formation of fiscal policy are due to, among other things, the mismatch of the expenditure side with the revenue side of the state budget and the specific structure of budget expenditures and receipts. On the other hand, the extent to which the mistakes made will manifest themselves and generate problems in public finances and the financial risks resulting therefrom is also largely likely to result from the economic and financial crises that are appearing with increasing frequency. Over the past few decades of time, the frequency and scale of emerging economic, financial, energy and other crises have been steadily increasing. The financial crisis of the late 20th century generated by the overvaluation and stock market crash of Internet dotcom stocks. Then the global financial crisis of 2008 derived from overly lax monetary policies, overly relaxed mortgage lending policies and moral gambling by financial institutions involved in the process of financing these loans carried out mainly through the issuance and sale of subprime bonds. After a little more than a decade, a pandemic economic crisis emerges in 2020, which is originally derived from the occurrence of panic in the capital markets, when the World Health Organization on March 11, 2020 declares the Covid-19 pandemic state and then the economic crisis and recession of the economy is aggravated by the introduced lockdowns imposed on economic entities operating in selected, service sectors of the economy and the so-called national quarantines also introduced in some countries. During the Covid-19 pandemic in some countries, in order to limit the scale of the increase in unemployment, historically record amounts of added money were introduced into the economy, which is described as a kind of interventionist financial anti-crisis measure. However, the inevitable result of this kind of ultra-lenient fiscal policy and at the same time the relaxed monetary policy also applied at the time with interest rates lowered by central banks was a strong increase in inflation. The increase in inflation caused an increase in the cost of economic activity and a decrease in the economic process activity of companies and enterprises. Then anti-inflationary central banks raised interest rates. The result was an increase in the cost of borrowed money in loans, advances and Treasury debt securities. This then generated a significant decline in the level of investment in many sectors of the economy, a process that worked most rapidly and on the largest scale in the cyclical sectors, i.e., the housing sector, for example. The decline in investment in the housing sector was also associated with a decline in the creditworthiness of potential borrowers interested in buying an apartment or house on credit. In 2022, there was an energy crisis, which was initially inspired by the outbreak of war in Ukraine and then by a strong increase in energy commodity prices. The energy crisis was particularly profound in those countries where, as in Poland, for example, the processes of green energy transition were carried out on a limited scale resulting in energy generation still from conventional combustion energy based on burning fossil fuels, mainly coal and/or lignite. The result of the economic crises of 2020-2022 was the occurrence of economic recession in a large part of the countries in the first half of 2023. During all these crises, many countries anti-crisis increased spending from the state's public finance system, and this despite the decline in tax revenues to the state budget. Thus, the obvious result of these processes and anti-crisis state financial interventionism was an increase in debt in the public finance systems of many countries. By 2024, in some countries, inflation had fallen around the inflation target and the rate of economic growth began to slowly recover from crisis and recessionary levels. However, the level of debt growth in a country's public finance system has been particularly high during this period, and it will probably take many years to reduce this level of debt to a level considered safe on an indicator basis (3 percent budget deficit to GDP and 50 percent public debt to GDP) even with certain restrictive fiscal policies and tightening monetary policy. The key issue of the problem of the growth of the debt of the public finance system of the state is that it is not a current problem, but, first of all, it is a prospective problem, the scale of which will grow in the future over the next decades of time, and not only in underdeveloped and developing countries but also in highly developed countries. The reason is the progressive process of changes in the demographic structure of society commonly referred to as population aging. Therefore, in the future, the scale of the risk of an increase in the indebtedness of the system of public finances of the state, the occurrence of a debt crisis of public finances and the deconstructive action of this process will unfortunately increase.
I have also described many of these above-mentioned aspects in my publications posted on my profile of this Research Gate portal.
I am researching this issue. I have published the results of my research in several publications, including the following chapters in a monograph:
“Recent economic crises and the prospective climate crisis of the 21st century and the green transformation of the economy” (Recent economic crises and the prospective climate crisis of the 21st century and the green transformation of the economy).
Chapter Ostatnie kryzysy gospodarcze a perspektywiczny kryzys klimat...
“Economic and financial crises in the 21st century and the anti-crisis state interventionism that prevents them” (Economic and financial crises in the 21st century and the anti-crisis state interventionism that prevents them)
Chapter Kryzysy gospodarcze i finansowe w XXI wieku oraz zapobiegają...
The key issues of the problematic sources of Poland's exceptionally deep energy cross in 2022 are described in my co-authored article below:
POLAND'S 2022 ENERGY CRISIS AS A RESULT OF THE WAR IN UKRAINE AND YEARS OF NEGLECT TO CARRY OUT A GREEN TRANSFORMATION OF THE ENERGY SECTOR
Article POLAND'S 2022 ENERGY CRISIS AS A RESULT OF THE WAR IN UKRAIN...
I described the issue of the importance of activating entrepreneurship and innovation of business entities for economic development in the article:
Article THE IMPORTANCE OF ACTIVATING ENTREPRENEURSHIP AND INNOVATION...
In view of the above, I address the following question to the esteemed community of scientists and researchers:
What could be the potential consequences of the steadily increasing indebtedness of the state's public finance system over many years, including the steadily increasing budget deficit and public debt both in relative, indicator terms expressed against the Gross Domestic Product and in terms of absolute numbers expressed in money?
What could be the potential consequences of the steadily increasing debt of the state's public finance system in multi-year terms?
What do you think about this topic?
What is your opinion on this issue?
Please answer,
I invite everyone to join the discussion,
Thank you very much,
Thank you,
Best regards,
Dariusz Prokopowicz
The above text is entirely my own work written by me on the basis of my research.
In writing this text, I did not use other sources or automatic text generation systems.
Copyright by Dariusz Prokopowicz
Dariusz Prokopowicz
The steadily perennially growing indebtedness of a state's public finance system, including the growing budget deficit and public debt, can have significant consequences, both in relative and absolute terms:
1. Economic instability: High levels of public debt and budget deficits can lead to economic instability, as they signal that a government may struggle to meet its financial obligations. This can erode investor confidence, leading to higher borrowing costs, reduced investment, and slower economic growth.
2. Fiscal sustainability concerns: Persistent budget deficits and growing public debt raise concerns about the long-term sustainability of a government's finances. High levels of debt can crowd out private investment, limit fiscal flexibility, and constrain the government's ability to respond to future economic downturns or emergencies.
3. Increased borrowing costs: As public debt levels rise, so do interest payments on that debt. This diverts resources away from productive investments in areas such as infrastructure, education, and healthcare, and increases the burden on future generations.
4. Inflationary pressure: Excessive government borrowing can fuel inflationary pressures by increasing demand for goods and services without a corresponding increase in supply. This can erode the purchasing power of consumers, reduce savings, and distort economic decision-making.
5. Sovereign default risk: If a government becomes unable to service its debt obligations, it may be forced to default on its loans. Sovereign default can have severe consequences, including a loss of investor confidence, capital flight, and financial market turmoil.
6. Social consequences: High levels of public debt can lead to austerity measures, such as cuts to social programs and public services, to reduce budget deficits. This can disproportionately affect vulnerable populations and exacerbate social inequality.
In summary, the steadily growing indebtedness of a state's public finance system, including budget deficits and public debt, poses significant risks to economic stability, fiscal sustainability, and social well-being. Addressing these challenges requires prudent fiscal management, responsible borrowing practices, and policies aimed at promoting sustainable economic growth and development.
The potential consequences of continuously increasing debt in a state's public finance system over several years include:
Economic Consequences
- High-Interest Payments: A significant portion of the budget is allocated to interest payments, reducing funds for essential public services and investments.
- Inflation: Excessive money printing to finance debt can lead to inflation, devaluing the currency and reducing purchasing power.
- Reduced Credit Rating: Credit rating agencies may downgrade the state's credit rating, increasing borrowing costs and reducing investor confidence.
Social Consequences
- Reduced Government Services: Debt servicing may lead to reduced funding for essential public services like healthcare, education, and infrastructure.
- Increased Taxation: Governments may increase taxes to service debt, potentially leading to decreased economic activity and reduced disposable income for citizens.
- Inter generational Inequality: Burdening future generations with debt may limit their economic opportunities and increase their tax burden.
Political Consequences
- Reduced Political Capital: Excessive debt may limit a government's ability to implement new policies or respond to emerging challenges.
- Political Instability: High debt levels may contribute to political instability, as citizens may become dissatisfied with the government's economic management.
- Loss of Sovereignty: In extreme cases, high debt levels may lead to a loss of sovereignty, as creditors may impose conditions or take control of state assets.
It is essential for states to manage their debt levels sustainably to avoid these potential consequences and ensure a stable economic and political future.
Added pressure on government spending comes from increased spending on war support and war readiness which has been worsening in recent years. Unlike spending on infrastructure, welfare and education, war assets are not very beneficial and are usually destroyed during testing or deployment.
So looking ahead, the rate of escalating government indebtedness may be worse than stated.
If governments keep overspending to make their populations happy, there may come a tipping point when bond markets no longer accept government debt, most of which to date has been honourably repaid by the debtor governments such as US, UK, Europe and Japan (the biggest debtor nations according to IMF data).
To address the risk of indebtedness, governments can default on their debts, raise taxes, cut expenditure ... all of which bring significant social consequences. So the risks transform from being economic risks to social ones which could produce extreme forms of government.
Let's hope the next generation can avoid a dystopian future.
The potential consequences of continuous years of increasing debt in a state's public finance system could be severe and far-reaching. Some possible effects include:
1. Reduced Credit Rating: A growing debt burden can lead to a downgrade in the state's credit rating, making it more expensive to borrow money in the future.
2. Increased Interest Payments: As debt grows, so do interest payments, diverting funds from essential public services and investments.
3. Fiscal Unsustainability: Excessive debt can make it challenging for the state to meet its financial obligations, potentially leading to a fiscal crisis.
4. Reduced Government Services: To address debt, the state might need to cut back on public services, impacting healthcare, education, and infrastructure.
5. Higher Taxes: Increased debt could lead to higher taxes or fees to generate revenue, potentially burdening citizens and businesses.
6. Economic Stagnation: Excessive debt can limit the state's ability to invest in growth-promoting initiatives, hindering economic development and job creation.
7. Loss of Public Trust: Persistent debt growth can erode trust in government, undermining confidence in its ability to manage finances effectively.
8. Increased Risk of Default: In extreme cases, unsustainable debt levels can lead to default, causing severe economic and social consequences.
9. Reduced Ability to Respond to Emergencies: High debt levels can limit the state's capacity to respond to unexpected expenses, natural disasters, or economic shocks.
10. Intergenerational Inequality: Burgeoning debt can transfer the burden to future generations, compromising their economic prospects and social well-being.
It's crucial for policymakers to address growing debt through sustainable fiscal practices, ensuring a stable financial future for the state and its citizens.
The majority of economists seem to have a rather one-sided view on debt - especially on public debt, and they overlook, that somebody's debt is an asset of somebody else. Maybe, one should reverse the question and ask: "What are the consequences of falling public debts?"
Increases of public debt can have many causes. Most of them can be seen as both positively and negatively - depending on the social and economic situation and development.
Up to now, nobody has discovered an optimal level and development of public debt. According to EU rules, public debt should be below 60% of GDP, and the lower the better. But comparing the member states, it is not clear, whether countries with lower debts are really better-off.
This 60%-goal seems to be derived from the Domar model which says that (in the long run) debt/GDP=deficit/GDP divided by nominal GDP-growth. If one assumes a 3% real growth, inflation of 2% (i.e about 5% nominal growth), then the debt ratio would approach 60% for defiicits of 3%. The (continuous) Domar model underestimates the debt ratio. In fact, it is easy to show that the ratio is by the growth rate higher (i.e. 63% under the above assumptions). Apart from that, a long-term 3% real growth seems unlikely for many countries and may not be compatible with environment goals.
Some answers brought concerns about negative effects on ratings. I think that countries should not allow being rated. It is strange, that states give prvate firms so much power (and profits). I think that international institutions (like IMF, OECD etc.) can provide better information.
Imo, the main economic consequences are:
- Decreased savings and income
- Higher interest costs
- Lack of flexibility
- Risks of a new and deepening crisis.
- Conclusion: Such cycles or trends, dear Dariusz Prokopowicz , can't be sustained, which means a major economic correction will happen, either by human macroprudence or by sociophysical entropy.
- ______________________________
Blessed are the young for they shall inherit the national debt.
Herbert Hoover
The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale. ― Thomas Jefferson
______________________________
Ref/
https://global4cast.org/2019/04/social-entropy/
https://www.eoht.info/page/Social%20entropy
https://en.wikipedia.org/wiki/Social_entropy#:~:text=Social%20entropy%20is%20a%20sociological,be%20wealth%20or%20residence%20location.
Preprint Social Thermodynamics 2.0
The state's public finance system's ever-increasing debt is reason for concern, as it could have a variety of ramifications for the economy and citizens. The debt could limit the government's ability to deliver important public services, increase the burden of interest payments, and slow economic growth. One of the potential implications of rising debt is the government's incapacity to deliver basic public services to residents. As the debt grows, the government may have to reduce spending for critical areas like education, healthcare, and infrastructure. This could result in a reduction in the quality of services offered to individuals, lowering their overall quality of life.
Another consequence of rising debt is the burden of interest payments. As the debt accumulates, so do the interest payments, which can devour a sizable percentage of the national budget. This could result in a reduction in financing for other areas, limiting the government's capacity to invest in important infrastructure projects that could boost economic growth. The rising debt load may potentially have a negative influence on economic growth. As the government's debt grows, investors may become unwilling to invest in the economy, resulting in less foreign investment and slower economic growth. Furthermore, the government may have to raise taxes to pay off the debt, which might reduce consumer spending and further stifle economic growth.
Another potential consequence of increasing public debt is inflation. When the government borrows heavily to finance its operations, it may be forced to print more money to pay back the debt. This increases the supply of money in the economy, leading to an increase in prices. Inflation can have a devastating effect on the economy, as it erodes the purchasing power of consumers, and can lead to a decrease in investment and economic growth.
Furthermore, rising public debt can cause a loss of trust in the government's ability to manage the economy. As the debt grows, investors may become apprehensive about the government's capacity to repay its debts, resulting in a decrease in demand for government bonds. This may result in more interest rate increases, making borrowing more difficult for the government. A loss of trust in the government can also result in a drop in foreign investment, stifling economic progress. Increasing national debt has a long-term consequence. High debt levels can have long-term effects, such as limiting the government's ability to respond to future economic crises or emergencies.
This is because a high level of debt limits the government’s ability to borrow money in times of need. In addition, a high level of debt can limit the government’s ability to invest in critical areas such as education, healthcare, and infrastructure, which can have a negative impact on future economic growth.
Dear Stephen, what do you mean by savings? If it is the amount of deposits on savings accounts (in domestic banks), then the emission of government bonds could, in principle, lead people to withdraw from these accounts to buy bonds. I do not think such a savings reduction could be a real economic problem, apart from that the purchase of bonds can also be seen as an increase of savings (in a less narrow definition). If, by savings you mean the amount of not-consumed income within, say, a year, I do not understand, why they should fall because an increasing public debt. If people really saved less, i.e. increased private consumption, this would add to GDP, and income will likely increase. At least, I do not see why it should decrease.
Some answers do not distinguish between the debt level (stock) and its increase (flow). Dariusz' original question concerns the second.
Debt supported by production of goods,services & agros consumption will never be a problem.