Government borrowing is large but not yet a problem

HM Treasury building

Advanced country governments have found it easy to increase their borrowings at very low interest rates, but they can’t make a habit of borrowing such large sums.

Over the last three months, most governments have greatly increased their spending and suffered a major decline in tax revenues. There was always going to be a large cost from closing down many sectors as they pursued tough policies to limit the spread of the virus. As a result, government borrowing has risen dramatically. Some are now asking if this is sustainable? How will all this debt be repaid?

The good news is so far advanced country governments have found it easy to increase their borrowings at very low interest rates. In some cases, savers have been willing to pay the governments for the privilege of lending to them with negative rates on leading government bonds. It has also been possible for governments to borrow long if they wish, putting off the day when the debts have to be repaid.

Countries that retain the confidence of financial markets can look forward to rolling the debts over in due course, when they do fall due. Most countries allow their debt pile to be managed by the advantages of economic growth, gradually reducing the proportionate impact of past debts, rather than rushing to repay them.

View Full Article – published by Charles Stanley on 22nd July 2020

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