International of Economics Issue: Debt Burden

 The Impact of Increasing Debt Burden

    The term "government debt" refers to the total amount of external and internal debt that contributes to the public debt burden, which also includes the costs of paying off debt. Debt financing is essential for creating sustainable economic growth since public debt increases eventually deter private investment, increase budgetary pressure, reduce social spending, and make it more challenging for governments to implement measures.

    One of the factors of increasing debt burden is the COVID-19 pandemic outbreak. The debt-to-GDP ratio unexpectedly increased by 60.7% and reached 256% of GDP in 2020.  Public sector debt climbed to RM1.35 trillion by the end of 2021, equivalent to 89.5% of GDP. Borrowings to cover the deficit, COVID-19 aid, and stimulus packages contribute to a rise in the federal government's debt levels. Next, it is also caused by insufficient saving and investment. There is a situation in which overborrowing leads to bankruptcy, as well as a lack of savings and the need to borrow more money. Furthermore, as the cost of living has risen, inflation has caused and thus exacerbated the debt burden. Many are enduring severe financial distress, which leads to lower purchasing power. Hence, there will be lower revenue available to fund debt, which causes an increase in interest rates and has a negative impact on debt.

    Moving on to the impact of the rising debt burden on the performance of the economy, an excessive debt burden could distort the economy directly by creating suboptimal transfers. This issue can be more serious when the debt raises goods and service demand without increasing production at the same rate. Besides, rising debt burdens can cause financial distress by looking into the measures taken by economic agents to shutter the gap between ex ante demand and ex ante supply, which resulted in a clear disparity between debt servicing needs and debt-servicing capacity. Moreover, rising debt burdens can cause hysteresis, which means that the compensating adjustment mechanism has added costs for future adjustments. Furthermore, rapid growth of the debt burden can create bezzle which led to skyrocketing prices of stocks, real estate and other assets which put pressure on banks. A case study of the USA illustrates how the debt burden crowds out private investment and eventually reduces the government's flexibility to intervene in dealing with the issue during the financial crisis.

    According to data on global debt, Japan's debt has experienced a rapid increase due to the coronavirus outbreak's emergency funding. Most of Japan's national bonds have fixed interest rates, and as nominal GDP growth slowed, the debt-to-GDP ratio increased. The Bank of Japan buys the vast bulk of domestic bonds and allows the government to borrow money at a ridiculously low interest rate to support such high debt levels. One of the worst financial crises since the Great Depression occurred with the 2008 global financial crisis (GFC). Along with the so-called PIGS (Portugal, Italy, Greece, and Spain), this country in southern Europe was one of the most impacted by the GFC's consequences as they fought to refinance their public debt and save failing banks. Next, Italy's debt is so high at 134.1%, mainly due to regional factors. During the pandemic, there was a large surge in government borrowing. According to Fitch Ratings, Italy's gross general government debt-to-GDP ratio will remain high until 2025 since GDP growth is expected to decelerate more swiftly than decreases in the budget deficit. 

    On the other hand, Malaysia has experienced a high-debt-to-GDP ratio since 2009. Malaysia’s debt has never been recorded below 50% over the last eight years from 2007 to 2021, except for 2010 (49.6%). In 2020, the debt-to-GDP ratio experienced an increase of 9.7% and hit 62.1%. The Ministry of Finance claims that the 60% statutory debt ceiling has not been exceeded, despite the fact that federal government debt was at RM879.6 billion, or 62.1% of GDP, by the end of 2020. According to Bank Negara Malaysia, Malaysia’s debt had climbed to around RM 1.40 trillion as of 2021. To highlight, Malaysia had the highest ratio of household debt-to-GDP (89%) in comparison to other countries. Malaysians bear RM 1.4 trillion in debt, where most of the debt belongs to housing loans (58%), and the least is credit card debt (3%). In the short run, it will drive the economy upward but have an inverse impact in the long run. To elaborate, society has access to credit and is able to purchase goods and services. However, as time goes on, the debt interest repayments hit them and drag down consumption. 

    To reduce the debt burden, the government can reduce its spending. The austerity measures are implemented with the aim of minimizing spending, reducing debt, and lowering fiscal deficits. For instance, Ghana’s government decreased its expenditures through a reduction of 30% in terms of discretionary and government minister's salaries. However, this measure may impede economic growth in certain cases. Besides, the government can raise taxes for debt repayment. As evidenced by the tax transition from GST to SST, this has resulted in an RM25 billion boost in the government’s annual earnings. It is also suggested that the Malaysian government raise tobacco taxes, as Japan received approximately RM29 billion in total revenue, which is RM25.1 billion more than Malaysia.

    In conclusion, the constant budget deficit and overborrowing have increased the debt burden. Hence, Malaysia will be unable to repay its national debt if it continues to run a budget deficit in the long run. Unless the budget deficit is less than 4%, Malaysia will benefit from stable economic growth.