How Does a Country’s Debt Affect its Citizens?

Currently my country, Philippines, has tons of debt and it keeps increasing every year.

There’d be stats like, each Filipino has 120k php (around 2.3k usd) of debt. But of course the individual doesn’t directly pay for the debt but rather supposedly taken from the taxes we pay.

So how does it actually work?

  • SociallyIneptWeeb
    10•1 year ago

    Ok, so the idea that “government debt is the debt of the citizens” is not entirely true.

    In general government takes on debt if it’s planned spending is bigger than its revenue.

    There are many reasons for that phenomenon, the main being, that the government undertakes many programmes (for example social security) that it needs to pay for, as well as the cost of its operations etc. being bigger than the profits from those operations.

    There are two types of govt debt - external (owed to foreigners) and internal - owed to its own citizens (which is why saying that each individual citizen “owes” some amount of govt debt is inaccurate). The latter is mostly in the form of govt bonds and loans from national banks.

    There are two main impacts of govt debt:

    1. High debt can cause an increase in interest rates, which will lead to a fall in private investment (which is a component of GDP, and translates to future economic growth i.e. high debt --> high interest rates --> lower investment --> slower growth)

    2. And obvious one is the risk of a sovereign debt crisis like in Greece, when the government is unable to repay its debt, leading to an economic crisis, collapse of the economy, IMF loans and all that “good stuff”. That is an extreme situation, and usually means that the country is in deep shit regardless of debt.

    There are also tangentially related risks.

    1. Inflation - One might ask “Why not issue more money to pay off the debt?” Inflation is the answer why. According to theory, one of the forms of inflation is monetary inflation, when there is so much currency available, that the purchasing power of the currency unit (i.e. $1, 1€ etc.) falls, so prices rise to keep up with the fall.

    2. The decrease in purchasing power of the currency also means, that foreign currencies become “stronger” in relation to it. That’s good if you’re earning your wages in dollars, but your home currency is falling (since your wages effectively rise in value) but if you’re in the opposite situation it can be a problem.