BUDGET
The government creates a budget yearly that outlines their revenue and how they plan to spend money.
Budget deficit: government spending > government revenue
Budget surplus: government spending < government revenue
Balanced budget: government spending = government revenue
A government budget deficit is paid for through borrowed money, which means the government takes on debt.
A budget surplus can be used to pay previous debts.
DEBT TO GDP RATIO
Government debt is the accumulation of government budget deficits
To measure the sustainability of government debt, the debt-to-GDP ratio is used.
Debt-to-GDP ratio = Debt/GDP
A higher ratio means it will be more difficult to pay off debts.
A recommended Debt to GDp ratio is 0.6, or 60%.
COST OF HIGH GOVERNMENT DEBT
As debt-to-GDP ratio increases, more money must be paid to creditors to cover the interest.
Debt-servicing is the repayment of principal/interest on debt owed.
Credit Ratings
Countries have a credit rating similar to an individual's credit score.
The rating represents an assessment of how likely a government is able to repay its debt.
Impact on Future Government Spending
A government that must pay its debts is unable to use that money to promote economic growth by spending on education, healthcare or infrastructure.
Methods to Know if Debt is Sustainable
Some countries repay their debt back regularly, while others struggle to service their debts.
Factors that indicate the sustainability of debt:
-Political stability
-Composition of debt: loan duration, loan provider
-Vulnerability of economy: level of development, dominant sector (primary, secondary, tertiary, quaternary)