How and Why do Countries get into Debt?


Friday, February 12th, 2010

If you are a homeowner and a family man and you have, at some time, lived beyond your means in an effort to provide for your family all the things that they want- then you will know roughly how many Western governments feel at the moment.

If, at some time, you had a cash problem and decided the only way to get out of trouble was to rashly throw more and more money into the hat, just to keep things moving and prevent your personal “economy” from collapsing around you. If you kept that going for a long time and then finally realised you could do no ore, had no way out and need help- then you know exactly how some governments feel at the moment.

Governments provide for the people in their countries. Depending on the country involved, they will provide for law and order, health services, upkeep and maintenance of the towns around you, transport (Including roads), education, social services and the vast mechanism needed to keep the life of that country running.

To do all that they need money- a lot of money. They raise most of the necessary funds from all of us, through taxes.

The problem is to get elected they have to make promises and to keep the people who elected them happy (so they will vote them in again) they sometimes (!) promise more than they can afford to deliver. Then something bad, maybe a recession comes along and their revenues fall just when more money is needed for things like the social services, helping the unemployed etc. Either the government cuts back on spending, raises revenue (i.e. taxes) or it borrows money and runs a budget deficit.

Most governments decide that a certain level of deficit is inevitable from time to time, a country can’t keep switching services on and off. At the moment the level of deficit widely regarded as being acceptable, sustainable (and manageable) is 3% of GDP.

Then a bigger problem comes along- say a credit crunch like that of 2007 and governments face a bigger problem. They decide that they need to spend huge amounts of money to keep things running and prevent whole sections of their finely crafted way of life from collapsing. This would cause great hardship and, by the way, make sure they never got elected again!

So- they run up massive government deficits. Greece, the UK, Spain, Portugal, the USA and others all have deficits many times the level that is comfortable.  Well over 10% of GDP in many cases. They now face the problem that many struggling families face. They cannot borrow that much without the interest payments becoming totally unaffordable. Indeed, people may not be prepared to lend it to them anyway.

What do they do? They can still try to raise revenue, but where economies are concerned, it’s not that simple. There is a point at which raising tax rates damages the economy so much that little or no extra revenue is raised. It’s also a deeply unpopular thing to do, so it won’t happen anywhere near election times.

 Besides, as anyone who’s had to go to any form of debt counselling will have been told, there is only one certain, long term solution for someone who is running up more and more debt and that is to spend less.

That is why whoever wins the UK General Election this year will have to announce huge cuts in government spending, far more severe than any of them are talking about before the election. It is why countries like Greece are announcing cuts severe enough to cause strikes and riots when people heard the measures proposed.

But this is medicine which must be taken, In the USA; the worrying thing is that when budgets appeared aimed at cutting the deficit to $1.3 trillion in the second year, members of congress and the senate immediately started worrying whether these cuts were possible.

They have to be- we, the people, have to understand that these measures need to happen. This is our money governments are spending and they’re doing it to provide us with services... admittedly- they don’t always get it right and much is wasted. However, if the money is not there, then spending levels must be cut before problems get even worse. After all- countries can go into bankruptcy as well and that’s no fun for anyone involved.



Article by Peter Matthews

The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com



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Tags: debt, economy, taxes,

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Comments:

JD (May 27, 2013 7:46 PM)
The only logical way to solve this problem would be to start back at the beginning when people weren't worried about being re-elected. Our leaders only cared about what was best for the people. Even if the consequences are not going to be pretty. The leaders of the United States are so power hungry that they have NO courage to make the decisions that will be hard but will ultimately pay off. But everybody is so afraid that times are going to get hard and suck. What they don't see is that the longer we wait to do something, the more difficult it is going to be when hard times hit.
Seamus O' Sullivan (September 7, 2011 4:36 PM)
I love the way you gloss over the part where the State steals money from people. A common euphemism is used: 'taxation'. Moral insanity.
Prudence Brown (the jilted one) (July 30, 2011 2:27 PM)
I think we should expect a higher level of financial disciplin from our government than from Joe Bloggs in the street with his low wages and credit card.If we made a rule that all people who genuinely are unemployed didnt have to pay their credit card payments until they got a job these money grabbing financial institutions would stop handing out their cards to all and sundry and the other vultures who prey on the debt ridden would disappear also.The Government should observe strict economic disciplin and live within our means and set the example to the common masn
Sigurd (July 13, 2011 2:50 AM)
Man, this is reeeally interesting. The whole 'system' seems flawed. I love democracy (i think). Well, i love it compared to a dictatorship, but when you put it the way you did, as in comparing it to a family, it seems wrong. Yes when we were growing up and were told "we can't afford that" we were disappointed but didn't think anthing less of... But we didn't have the chance to 'vote' for a new parent, a parent who WOULD get us that something. ('taking the medicine' is also like ASKING a kid to take its medicine. What do you think the kids gonna do?)
Norma Roberts (May 6, 2010 1:35 AM)
So basically they are spending money they have not got to maintain lifestyles and remain popular with the electorate? Which, on a much smaller scale, but exactly the same principle, is like whoever holds the purse strings in a family continuing to live beyond their means: buying that "designer" (I hate that word!) dress,sofa etc giving the kids the computer games,mobiles,tvs, takeaways etc because they do not want to be the bad guy and say "no we cannot afford it" How on earth do you think families managed before overdrafts and credit cards etc were so readily (and far too easily) obtainable? When I was growing up in the 50's and 60's I was told "we cannot afford that "on a daily basis, I was disappointed yes but I do not remember thinking any less of my parents. I was fed, clothed and had a roof over my head, think of all the people in the world who do not have that, this was a fact I was reminded of whenever I was denied something I wanted which was unaffordable to us. My son is at university studying maths, he could not get a job last summer because of the economic climate. He had not budgeted for this eventuality so I paid all his expenses (using my overdraft). I insisted he paid me back, but felt sorry for him and ended up letting him just pay back half of the amount he owed me, this amounted to over 600. My parents would NEVER have been able to do that for me, they simply did not have access to that kind of money. I did it because I did not want him going short of food or unable to pay his rent etc but, most importantly, I did not want him to have to abandon his studies. I am wondering now if I did the right thing, his mobile stopped working recently, did he buy a modest basic phone for about 30? no he purchased (with his credit card) a blackberry, or an iphone ,I'm not sure which, either way it cost hundreds of pounds. He does not see this as a luxury and never even considered a basic budget phone, why? Because in his words "everybody has this sort of phone nowadays mum" There lies the problem everybody has to have what others have regardless of whether they can actually afford it.
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