Net public debt as a percentage of GDP increased sharply from 2009 to 2014 befor
ID: 1117726 • Letter: N
Question
Net public debt as a percentage of GDP increased sharply from 2009 to 2014 before leveling off. Federal budget deficits as a percentage of GDP rose dramatically after 2008 before falling back to more normal levels about 5 years later. Why do you suppose that net public debt as a percentage of GDP has grown more slowly recently than was the case between 2009 and 2014?
Federal budget deficits are
subtracted from
the stock of the net public debt each year. As deficits have declined in relation to GDP in recent years, the amounts added to the net public debt have also
decreased
, which has caused the net public debt as a percentage of GDP to grow at a
slower
pace.
Explanation / Answer
Budget deficit is a scenario where the budgeted expenses are more than the budgeted incomes for the government. If a country has budget deficit, then to supplement for funds the government has to opt to borrow funds. The government can either borrow funds internally from the people of the country or from other countries or supranational organisations like world Bank.
When the government borrows funds internally from people of the nation, it is called public debt and when it borrows funds from other countries, it is called foreign debt. Servicing internal debt is cheaper than foreign debt. Hence most countries opt for internal debt. Federal faced budget deficit from 2009 to 2014. This forced the federal to raise funds through public debt. Hence public debt increased in the time period in relation to GDP. After this period, budget deficit has reduced and hence the demand for public debt has increased. Thus the pace of increase in public debt is slower compared to previous period.