Reasons and Solutions to Overcome Debt Crisis in Developing Countries Term Paper

Excerpt from Term Paper :

U.S. NATIONAL DEBT

The national debt of the United States is at an all-time high in dollar terms.

What is national debt?

National debt just like personal debt can be defined as the obligations that the government has to other parties with regard to money. It can also be defined as the claims of other nations and institutions on the assets of a country. A situation of national debt occurs when internal revenue collection does not generate enough to cover its expenditure thus raising the need for additional funds from other sources. Normal sources of revenue for federal governments include taxes, levies for various services such as issuance of travel documents and licenses.

US Debt history- The Trend

The option to incur debt has been adopted by the U.S. since its inception as a nation. The budget for the nation has thus always exceeded the resources at hand. Some factors, such as the wars the country went through, contributed to the scarcity of resources.

Wars required a lot of resources, which were expensive to maintain. Food, water, and wages for servicemen and ammunition were just some of the costs that had to be met. The revolutionary war for example resulted in a massive $75 million debt. This situation had the new government looking for ways to repay the debt and resulted in the issue of bonds.

Another war that greatly increased the debt problem was the civil war. This war caused the U.S. debt rise to almost about $3 billion. This was over 3500% of the debt at the formation of the nation. This trend of rapid debt increase would besiege America for many years to come.

As the 20th century began and the first and second world war took place, the debt problem of the U.S. would only grow worse. Other factors such as the great depression and plans that were set up to deal with the depression only consumed the resources faster than they could be collected. By mid-way through the century, the U.S. had incurred a debt of over $250 billion.

The second half of the century did nothing to improve the problem as it only helped the national debt to increase further. There were numerous government interventions and services needing more funds such as education, subsidies, provision of utilities, medical care, running of courts among others. There was also the security of the United States, which had to be a priority at all times. In thirty years, the debt figures had risen from $260 billion in 1950 to over $900 billion in 1980. Ten years later the figure skyrocketed to $2.7 trillion.

The following years saw this trend continue and by 2015, the U.S. sovereign debt was at an all-time high of over $18 trillion and expected to grow further.

Clearly, as compared to figures in the last century, the debt figures that are present today are much more than of those in the past. It seems that the U.S. has no qualms about shoring up debt that measures almost three quarters the size of its Gross Domestic product.

A discussion about Limiting Debt Growth

Implications

Rapid growth of national debt has serious implications on the nation's economy as well as on the life of its citizens. Large and unmanageable debts may have the nation prioritizing debt payments to development spending in order to avoid sanctions from lenders. Greece is a recent example and its citizens are suffering as the nation bends over backwards to come up with scheduled payments. Taxes also rise with increase in debt, as funds must be raised to meet obligations.

In the U.S. currently the national debt problem can be translated to over $150,000 for every taxpayer in the country. The increase since mid-2000s implies that the debt rises yearly by over 7%. Were the country to declare bankruptcy, there would be serious implications for the citizens. Thus, the problem should be treated as urgent and be given the highest priority by the government.

These facts clearly indicate that growth of debt should and must be limited. Every fresh attempt at new debt must be questioned critically and all alternative options exhausted before the decision is made. As well, the government has a moral duty to create awareness in its citizenry of how large this problem is.

Strategies towards Debt Control

Government Spending Cuts

Several strategies have been proposed in order to limit the growth of this debt. Some came up in earlier years when those in charge of the state looked for ways of reducing the national debt. Some presidents in the past, implemented measures to reduce spending by government in order to have more funds available for debt payments. Added on to this was the inevitable increase in taxes. These attempts worked to reduce the debt in the years leading to and, in the early fifties.

Reduced government spending is a key strategy in lowering debt. Schnurer in his book, Cut the Deficit, not the Government, proposed that spending in large public enterprises should be reduced drastically. He termed this spending as unnecessary and that this reduction would see the government deficit reduce by half. Ironically, this is what lenders such as the World Bank and the IMF required of third world countries in order to qualify for funding. A lot of money is sunk into these institutions yet they do not operate profitably.

Wasteful government spending is not just in large public institutions alone but also in the military expenditures. The U.S., in the last few years, has fought wars whose wisdom in engagement is largely questionable. The military expenditure in these wars including millions of dollars spent to build facilities in some of these nations can only be described as reckless given the huge debt that the country owes. While security must remain a priority, expensive interference or interventions in other people's problems does not augur well for the debt problem.

Canada has a history of success in implementing reductions in spending. It was able to reduce its national debt by over 30% within five years. This option, however, requires that the citizens of the nation understand the magnitude of the national debt is and the potential impact of not managing the figures.

Fiscal Measure-

Interest rate

Another strategy adopted by many nations is interest rate manipulation. The Federal Reserve can implement measures to lower interest rates so that it can spur economic activity. When interest rates are low, businesses have greater access to funds as do individuals. The aim of this is to create a ripple effect, which starts from the ability to produce more, purchase more, create more jobs, and thus more tax revenues. This however can only be a short-term measure as very low interest rates can end up hurting the economy. For the government to use it thus, specific timelines must be set when the measures will be put into place. After the desired economic result has been achieved, then interest rates can be readjusted.

Taxes

Increasing taxes is an easy option for the government but a hard one on the taxpayer. It can be effective where it is put to work together with a reduction in spending. However when unaccompanied by this, it is bound to fail as the extra revenue received only goes towards increased spending. At the same time, taxes can only be increased by a certain amount that must not be detrimental to growth or scare off current or potential investors. This frequently adopted strategy should come as a last resort as it has rarely been found to have a lasting impact in the past.

Restructuring

Some nations have also adopted the option of defaulting on their debts and negotiating for a restructuring of the same. Defaulting on national debt has serious risks including the imposition of sanctions. It also comes with the loss of investor confidence and may result in the pulling out of major international corporations. However, the measure has worked in some nations where it has been adopted. However, given the stature and history of the U.S., this may not be a viable option as of now.

Volume trading

Another strategy is the aggressive promotion of business and trade. The nation can tackle its debt problem directly by seeking income through the aggressive sale of its products. America has abundant natural resources that it can export for increasing revenue towards debt repayments. Some Middle Eastern countries have reduced a great portion of their debt by selling oil. Saudi Arabia is one beneficiary of this strategy.

References

Investopedia. Successful Ways That Governments Reduce Federal Debt. 2015. 26 October 2015. .

Koba, M. National Debt: CNBC Explains. 29 June 2011. Document. 26 Oct 2015. .

Patton, M. National Debt Tops $18 Trillion: Guess How Much You Owe? 24 April 2015. Document. 26 Oct 2015. .

Schnurer, E. Cut the Deficit, Not the Government. 6 Aug 2014. 26 Oct 2015. .

Topoleski, J. Growing Deficits Over the Long-Term Would Cause Federal Debt to Exceed 100% of GDP by 2039.…

Sources Used in Document:

References

Investopedia. Successful Ways That Governments Reduce Federal Debt. 2015. 26 October 2015. .

Koba, M. National Debt: CNBC Explains. 29 June 2011. Document. 26 Oct 2015. .

Patton, M. National Debt Tops $18 Trillion: Guess How Much You Owe? 24 April 2015. Document. 26 Oct 2015. .

Schnurer, E. Cut the Deficit, Not the Government. 6 Aug 2014. 26 Oct 2015. .

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