<SUSTAINABLE DEBT>

--THINK AHEAD--

"Imagine two students.

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"Student A avoids all debt — they don’t take loans or borrow money, but that means they can’t afford resources like a good laptop, tutoring or transport."

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Student B has taken on a lot of debt but uses it to pay for things that improve future opportunities, like courses and equipment.

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Which student is actually better off in the long run?

Can borrowing ever be a smart decision? What makes someone’s debt sustainable — is it how much they owe, what they use it for, or their future ability to repay? And if you had to lend money to one of them, who would you choose?

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--DEFINITION--

"GOVERNMENT DEBT refers to the amount of money that the government owes to its lenders."

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--HOW DEBT ARISES--

"If GOVERNMENT SPENDING > TAX REVENUE, the government is said to be 'RUNNING A BUDGET DEFICIT', which is usually FINANCED BY BORROWING."

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BUDGET DEFICIT => RISE GOV'T DEBT.

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BUDGET SURPLUS => FALL IN GOV'T DEBT.

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"As long as the government collects enough revenue to pay its interest payments and part of its principal, then the debt is referred to as SUSTAINABLE DEBT."

--HOW GOV'TS BORROW--

"The main tool used by the government to raise money is GOVERNMENT BONDS, which are DEBT CERTIFICATES that the government gives to lenders with the promise to pay them back the PRINCIPAL AMOUNT + INTEREST at some date in the future."

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--MEASURING DEBT: AS A % OF GDP--

--WORLD DEBT CLOCK--

--COSTS OF HIGH DEBT--

--DEBT SERVICING--

--CREATES OPPORTUNITY COSTS--

All debt repayments DIVERT LIMITED GOVERNMENT TAX REVENUE away from government spending commitments such as health and educational services
In addition, funds borrowed from overseas must be repaid in foreign currency which DIVERTS LIMITED FOREIGN EXCHANGE RESERVES away, which could have been used to import important capital goods.

--POOR CREDIT RATING--

A HIGH DEBT to GDP %, means that a country may have DIFFICULTY PAYING BACK its loans, hence it MAY receive a LOW CREDIT RATING.
WHAT DOES THIS MEAN?, This means that the country will find it difficult to secure future borrowing, plus if they do, the interest rate will be much higher in order to compensate the lender for the higher risk.

--POLICY INFLEXIBILITY/RECESSIONARY GAP--

In order to REDUCE HIGH DEBT the government will NEED TO RUN BUDGET SURPLUSES. In other words, they need to earn more than they spend, as this surplus will contribute to the repayment of debt.
So debt impacts the 'flexibility of policies,' as repayments can only be achieved through CONTRACTIONARY POLICIES through HIGHER TAXES and/or CUTS IN GOV'T SPENDING, both of which are UNPOPULAR.
BOTH LEAD TO A FALL IN AD, which creates a RECESSIONARY GAP, LOWERING 'C' and 'I'.
In a recessionary gap, CYCLICAL UNEMPLOYMENT OCCURS...
FALL IN INCOME TAX REVENUE + HIGHER GOV'T SPENDING ON UNEMPLOYMENT, and OTHER WELFARE => EVEN LARGER DEFICIT.
So what now? Even higher taxes, even less spending? But this will mean less GDP, which means less tax revenue and more spending on benefits....oh dear!!

--IMPACT ON INVESTMENT--

As mentioned, when the DEBT-TO-GDP ratio is HIGH, the potential for economic downturns increases, which, as you would expect, 'DETERS INVESTMENT BY DOMESTIC AND OVERSEAS FIRMS', as LONG-TERM RETURNS will be UNCERTAIN.

--POSSIBLE DEBT TRAP--

A HIGH LEVEL OF DEBT financed by foreign borrowing may have involved making economic and political concessions

--LOWER ECONOMIC GROWTH--

PORTFOLIO CHECKPOINT

--Use the markscheme below to construct a 10-mark answer--

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