Sustainable Level of Government Debt (HL)

Governments may run deficits (spending > income) in order to try to achieve other macroeconomic objectives. However, repeated budget deficits will lead to debt. 

Government debt refers to the total amount of money owed by the government to lenders. 

A debt to GDP ratio can be used to measure the amount of debt in relation to the economy's size - the US has more debt than Japan, but not when compared to their economies, for example. 

Costs of High Government Debt (AO2)

• Debt servicing costs: The money the government has to pay back (initial amount + interest rates). This will be higher when there is more debt.

• Credit ratings: A rating of a borrower's ability to repay a loan. This rating tends to be lower for countries that already have more debt, making it harder to get better loans later. 

• Impact on future taxation and spending: The money will have to be paid back at some point. Therefore, future sacrifices are made when taking on debt now.