Impact of Public Debt on the Economic Growth Essay Example for Free

Impact of Public Debt on the Economic Growth EssayGovernment debt is alike known as overt debt. It is the debt owed by a federal government to the internal or external sources. It is required when the stocks of government securities are insufficient to cover previous budget deficits. cypher deficits occur when the level of government expenditures exceeds its revenues. Based on macro frugal theory, the level of government expenditure must be positive with the frugal growth. The high the expenditure, the higher go out be the economic growth.Government expenditure can be divided into productive and unproductive expenditure. Productive expenditure testament be contributed to the economic growth in a few years time. Meanwhile, the unproductive expenditure will lead to the decline in the economic growth. Productive expenditure even out of education and health. Besides, the unproductive expenditure consists of expenditure like pension and subsidies. Meanwhile, high budget defic it will reduce the level of economic growth.In locate to finance additional expenditures, the government will borrow money from internal sources. Since the demand of the loanable funds is also derived from the private sector, additional demand from the government will boost the interest rate. Consequently, high interest rate will distort the level of investment. Finally, the lower level of investment will lead to lower economic growth for the country. In addition, high open debt will also result to a financial crisis.If a country is experiencing a trend of an increasing public debt, the investors may be worried about the capabilities of that country to pay its debt. Apart from that, they will ask for higher interest rate as a condom and profitable measures for them to keep financing the deficits. An increase in interest rate can distort the level of economic growth and would create financial crisis. Besides, it is also acts as an obstacle to the development because it will weaken s the governments ability to achieve macroeconomic stability.It comprises the stability of inflation, interest rate and exchange rate target. It will also create adverse incentives associated with future taxes. High debt also will stop the social and developmental progress. Malaysian economy may not be able to achieve high and sustainable economic growth in the long-run if the federal government keeps borrowing money from the domestic sources in govern to finance the budget deficit. However, there is no such evidence to conclude that the external debt can distort the economic growth in the long-run.