The public debt is represented by Government bonds issued to cover the public balance deficit. These securities are subscribed to by private small savers subscribing in small quantities and institutional investors like banks, investment funds, insurance companies, and national or international pension funds.
Public debt allows governments to redirect investors’ savings towards a safe investment option and provide resources that cover long-term public investments. In particular, public expenditures aim to cover long-term assets, such as structural investments necessary in an economic system, not current expenditures. For this reason, it’s said that public spending in deficit plays an important anticyclical role since, during a recession, it allows Governments to support weak levels of private demand.
The public debt undoubtedly has a price to pay: the interest rate as remuneration for this important service. This cost will be more negligible or higher on some important factors, like the overall level of interest rates, the risk associated with the issuing authority or country risk or rating, and the level of debt as a percentage of GDP, which determines its sustainability, that is, the Government’s capability to pay back the debt. Many countries, like the United States, several European countries, and most emerging countries, are over-indebted due to the economic policies adopted by Governments. In particular, politicians often use public expenditures to build political consensus, as happened in Italy with the law on Citizens’ Income or the building bonuses.
It’s good economic practice to cover current expenditures with tax increases even if this measure isn’t so popular; for this reason, Governments usually prefer to cover them with public debt. Nevertheless, many economists assert that this last measure sounds like a deferred taxation since, due to the higher level of interest rates payable, sooner or later, this will result in a fiscal pressure increase. The decision on the public debt level is essential for any country. In the United States, the debate on this argument is always fashionable; the hit of the debt ceiling due to a high level of public expenditure (e.g., military expenditures) always triggers intense confrontations between Republicans and Democrats that, without Congress authorization, could dramatically slow down public administration operations.
Another negative aspect is that many central banks tend to print more money to cover the higher public debts with public bond subscriptions, which has heavy consequences for the inflationary trend.
Despite public debt’s important anticyclical stabilization role, it is crucial to constantly monitor its levels. A massive public debt covering uncontrolled current expenditures would threaten most countries’ economic systems, negatively impacting future taxation levels and inflationary trends.
Article edited by Prof. Paolo Bongarzoni
Dean Swiss School of Management and Corporate Director
