2022 Exam Application Context - High and Low Government Debt
- AS, A Level, IB
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 25 Apr 2022
In this video we look at examples of countries where government debt is very high and contrast with some nations where the national debt is a much lower percentage of GDP.
National debt is the total accumulated government debt issued that is yet to be repaid. The level of debt can be measured in absolute terms (UK government debt is just over £2 trillion) or expressed as a % of a country’s GDP. This gives a better guide to the scale of debt.
In Japan, government debt is well over 250% of GDP - one of the highest in the world. In theory, this might be seen as a structural problem – since the Japanese government must pay very high amounts of interest on the debt each year.
But most of Japanese government debt is issued in Japanese yen and also owed to domestic residents such as households and Japanese corporations. The majority of interest payments therefore stay within the Japanese circular flow.
And yields on new issues of Japanese government debt are very low (the 10-year bond yield for Japan in April 2022 was just 0.25%). Low borrowing costs help to make a high national debt more sustainable from the fiscal viewpoint. Quantitative easing (QE) has helped to keep bond yields low in Japan.
However, with the size of the Japanese working population declining, over the long-term, the burden of paying back the debt through interest payments for debt-financed government spending will be borne by future generations of taxpayers. This is a fiscal problem that Japan must face up to sooner rather than later.
In Estonia, the size of the national debt is very low at just 18% of their annual GDP. However, this doubled during the pandemic. Having low government debt gives them plenty of scope to use an expansionary fiscal policy when their economy suffers an external shock.
But perhaps public sector (government) debt can also be too low? Estonia has become a successful member of the European Union but faces numerous economic and social challenges including an ageing population, high income inequality and low energy efficiency.
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