What is national debt

National debt

The definition of national debt

The national debt can certainly be set on a key date. For this purpose, all claims of the state, including the budgets of the federal states, municipalities, municipalities and the state social security agencies are compared with the liabilities.

The ratio to gross domestic product (GDP) is used as an indicator of the degree to which the national debt is still acceptable. Using the example of the USA, autumn 2013 showed that a national debt that is well over 100 percent of GDP can render the government incapable of action. For the EU states, according to the Maastricht convergence criteria, national debt should not exceed 60 percent of GDP.

The risks of public debt

While David Ricardo saw the national debt as the worst hostage of mankind, the economist John Maynard Keynes demanded that the state should become actively involved in the economic cycle if the economy is unsatisfactory. But the unlimited issuance of bonds carries risks for the state. On the one hand, this means that the interest burden can only be met by issuing further bonds; on the other hand, it weakens the international position.

The consequence of too high a national debt is, on the one hand, the yielding of the currency, which becomes an object of speculation, and, on the other hand, the loss of creditworthiness as a bond issuer. A poor credit rating requires higher interest rates for investors. A debt spiral arises.

Indirect deleveraging can lead to a phase of low interest rates. The uncertainty on the capital markets in 2012 meant that a government bond could be placed with a premium that was above the nominal interest rate. This meant that the state was still able to post a plus after paying the interest.

A high national debt also means a mortgage for future generations, as they have to answer for the debts of their predecessors. Critics put it in such a way that the indebted generation lives for future generations at the expense of tax increases.

The rationality trap: Debt relief also harbors risks

The rationality trap says that not everything that sounds reasonable has to be reasonable. A private household in debt comes to the solution that it has to save. This setting sounds reasonable. However, a debt-ridden state that is determined to implement austerity programs risks weakening the entire economy.

In order to avoid indebtedness, the state could withdraw as a client, for example from the construction industry. But this would cause a slump in the construction industry. The result would be unemployment. Lost tax revenues from employment would be offset by additional expenditures for social security for employees from the construction industry who have become unemployed.

The same applies to the cancellation of subsidies to private households. This in turn reduces net household income, private consumption is declining, in the best-case scenario only income from value added tax and trade tax is missing.

The German debt brake

The debt brake is a constitutional regulation that has been in force since 2009 and is intended to curb national debt in Germany. In 2012, the national debt in this country amounted to two trillion euros. It peaked in percentage in 2010 at just under 81 percent of GDP. This was 21 percent above the Maastricht requirements. The debt brake stipulates that structural net borrowing by the federal government may only amount to 0.35 percent of GDP. The federal states are completely forbidden from taking out new net borrowing. The exception is only permitted if funds are required due to a natural disaster, for example. At the end of 2016, the national debt in Germany was only 68.1 percent of the gross domestic product.

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