National debt – Does the size matter?

Every nation owes a big debt. But to whom they owe and does that really worth worrying?

It has been a while since the last time I wrote something, I had to fully focus on an incredibly intensive and difficult exam.  After spending two weeks on catching up with everything, I finally can back to writing. As you can guess, I love writing, I hope I can get better at it.

My topic this week is about National debt, a popular and controversial topic not only in Vietnam but also in many other countries. First of all, we can generally understand that national debt is the amount of money that the government of a country owes and has to pay in the future. The government obviously need money to finance the frustration developments, social welfare, national security and so on. Therefore, the national debt is inevitable. The amount of national debt generally is huge, unbelievably huge. For example, US national debt is approximate $19.2 trillion, UK national debt is roughly £1.56 trillion. If you good at math you can easily calculate the amount of debt per capita, which is usually amazingly high (about $56,000 per citizen in U.S). In Vietnam, it is estimated that national debt is VND2,096,200 trillion or roughly $94 billion, equally $1,039 per citizen. It may sound crazily scary since you immediately are in debt of $1,039 for no good reason. Let take a look at the sources of the national debts before deciding whether it is scary or not.

This gigantic amount of debt comes from both internal and external sources. From inside sources, the debt is in the form of securities like bonds issued to the public. In other words, a large part of the national debt is financed by the private sector of the country. Outside finance can come from funds of supranational organizations like IMF, World Bank or foreign investors (when they purchase the securities issued). For developing countries like Vietnam, the government can also owe money with relatively low-interest from the ODA funds (Official development assistance funds for developing countries). The interest, the term, the tenors can be vastly different time to time and sources to sources, therefore, it can be hard to indicate what sources is cheaper. But general speaking, it may be more positive that the government owes mainly from the internal sources because, after all, the money still belongs to the public inside the countries. However, without the external finance, it can be challenging for any country to develop at the expected rate.

The topic about whether we should worry about the size of the national debt is not new or uncommon. In fact, there are various opinions about the national debt, both for and against. From the for perspective, people indicate the national debt should not be a problem and we do not have to worry about the size of the national debt. Firstly, it is inevitable for developing and if we try to reduce the national debt, we certainly have to reduce the amount of investment budget in future, which can slow down the growth rate. Secondly, since the main part of national debt is financed by the public, the welfare may hardly be affected. It is better off for everyone. Thirdly, as many economists indicated, when a government spends effectively the funds on public projects, it can bring long-term benefits for society. People get paid better, then consume more and increase the domestic demand. Therefore, it is theoretically reasonable to believe that debt actually creates more benefits than harms. Lastly, despite how weird or stupid it seems, a nation can barely go bankrupt. It almost always can raise more funds to roll over, remove or extend the term with foreign sources. And even when a government decides to default on a debt from external sources, the lender can hardly impose any punishment or liquidate collateral.

On the other side of the argument, people state that debt is debt and the borrowers, in the end of the day, still have to pay them fair and square. As the result, when a government spends the funds inefficiently or the economy is in recession phrase, it is more likely that the government have to raise taxes to balance the interest costs and the incomes. Moreover, in many cases, the government can easily borrow at a very low rate of interest, which obviously seems to be positive in short-term but turnout not in the long run. Giving a clumsy and fat government with a low-cost fund is like spoiling your children with sweet candies. The governments may spend the fund carelessly until they realize that cost will eventually raise at some points in the future. Another significant reason to believe national debt brings negative impacts is crowding out effect, government taking sources which should be for private sectors. This effect will affect the ability of corporations to access to finance sources since the government takes way too much funds from the public and foreign investors (both for the amount and the costs). In shorts, it is too difficult to conclude that national debt is good or bad but we know for sure that our governments need funds and will continue to raise funds despite how large the amount of debt is.

About the size of the national debt, it is common to calculate it as the percentage of GDP so that we can interpret that we can pay the debt in the foreseeable future. In Vietnam, the national debt equal 65% of the GDP (the number can deviate from different sources). As the reasons above state, the size of national debts is not something to be worried. It is the ability to spend the funds efficiently that matters. Sadly, at the moment, Vietnam government is still under a lot of problems. We are soon to have to borrow funds at a higher rate and the systems are not very cost effective. In few years, the amount of debt will increase dramatically. However, in my opinion, trying to minimize the national debt may not be the brightest idea because Vietnam is in the growth phase and we have to do anything to grow at a high rate.

In conclusion, the size of the national debt, in fact, does not matter, and probably never will, while the efficiency of the government is truly the issue we should worry about.

P.s: I know that I just go on very general ideas about national debt and this topic is extremely sophisticated. Therefore, I am willing to listen from you guys about any idea.

(1) U.S Department of Commerce – Bureau of Economics Analysis
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

(2) U.S treasury Direct
http://www.treasurydirect.gov/NP/debt/current

(3) U.K Open Government Licence – Economics and Fiscal outlook (Nov. 2016)
http://budgetresponsibility.org.uk/docs/dlm_uploads/EFO_November__2015.pdf

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