Thursday, Jul 2, 2020
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The national debt

Governments, international agencies, rating agencies and most businessmen regard the level of national debt to the size of the economy (GDP) as one of the most important economic indicators in assessing the current and future health of the economy.

The national debt consists of funds borrowed directly by the government plus any debt of the government corporations which have been guaranteed by the government.

Governments usually borrow funds when there is a need to undertake capital projects (office buildings, schools, roads, docks etc.) and the revenue from taxes is insufficient to cover the capital works.

The size of any economy determines the level of potential taxes that could be collected to meet government expenditure needs for, among other things, education, health, law enforcement, social welfare and of course, debt servicing of any loans taken out by the government.

Current and future living standards in any country are influenced by the amount of resources applied by governments, on a yearly basis, to education, health, national security, social welfare and other public sector areas.

In order to ensure that sufficient resources are available on a sustainable basis for those fundamental public sector functions, good fiscal management compels governments to restrain the growth in debt servicing to a level where it does not threaten to crowd out and push aside the needs of the other important sectors of society.

In many third-world countries in Africa, Asia, Latin America and the Caribbean, the public resources from tax revenues to finance public debt have exceeded the public resources allocations for education and health; a position considered by many as an undesirable path towards the lowering of living standards.

In an attempt to address poor policy choices by governments, international agencies such as the IMF (International Monetary Fund), World Bank and the IDB (Inter-American Development Bank) which provide economic advice on a global basis, urge governments to try and keep debt ratios (total national debt as a percentage of total national output or GDP) to a reasonable level.

In the case of developing countries such as The Bahamas, the level suggested is somewhere in the region of 40 percent.

Most countries, particularly those in the developing world, have fallen short of that objective.

Indeed, with the exception of Trinidad and Tobago at 26 percent, many developing countries are in the high 80s (Barbados) or, in some cases the ratio exceeds 100 percent, (Jamaica at 123 percent for example), while the European countries have set the debt to GDP ratio at 60 percent as the desired level for their community.  Our nearest neighbor and largest trading partner, the United States, has a debt to GDP ratio that stands at an unusually high level of 97 percent.

When a country’s debt to GDP is high, it implies that the country is struggling and could have difficulty servicing its debt.

Currently The Bahamas’ ratio is in the high 50s and growing.

It is not yet in troublesome territory, but given the trend over the past few years and the growing commitments to further borrowing, including the Chinese loans and the associated capital needs of the utility companies, there is surely some cause for some concern.

The policymakers and other interested parties would need to closely monitor the debt situation to ensure that the nation’s economy remains healthy and that our living standards are not threatened by excessive public sector debt.

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