The perpetual borrowing dilemma: Unravelling the need for funds

Governments around the world engage in a continuous cycle of borrowing money, a practice that often raises eyebrows and sparks debate among citizens.

The question on many minds is, "Why does the government keep borrowing money?" This article aims to shed light on the multifaceted reasons behind governments' reliance on borrowing and the implications it holds for economies.

• Fiscal Policy and Economic Stability:

One primary reason governments borrow money is to manage fiscal policy and stabilise the economy. During economic downturns or recessions, governments may implement expansionary fiscal policies, such as increasing public spending or reducing taxes, to stimulate economic activity. However, these measures often lead to budget deficits, prompting the need for borrowing to cover the shortfall.

• Infrastructure Investment:

Governments borrow to finance large-scale infrastructure projects, such as roads, bridges, airports, and public transportation systems. These investments are crucial for fostering economic development, creating jobs, and improving the overall quality of life for citizens. Since the costs of these projects can be astronomical, borrowing becomes a practical solution to fund them without burdening the current generation with excessive taxes.

• Social Welfare Programs:

Another major driver behind government borrowing is the funding of social welfare programs. Governments aim to provide essential services such as healthcare, education, and social security to their citizens. To sustain these programs, especially in times of increased demand, borrowing becomes an essential tool to ensure the continuity of vital services without compromising the well-being of the population.

• National Security:

Ensuring national security is a fundamental responsibility of any government. Defence expenditures, including the maintenance of armed forces and investments in advanced technologies, often require substantial financial resources. Governments may resort to borrowing to meet these expenses, particularly during times of geopolitical uncertainty or when faced with the need to modernise military capabilities.

• Interest Rates and Monetary Policy:

Borrowing is also influenced by prevailing interest rates and monetary policy. In times of low interest rates, governments may find it more attractive to borrow, as the cost of servicing the debt is relatively lower. Central banks, through their monetary policies, play a significant role in influencing interest rates and can indirectly impact government borrowing patterns.

• Budgetary Constraints:

Governments may face budgetary constraints due to various factors, such as a decline in tax revenues or unexpected expenditures. In such situations, borrowing offers a short-term solution to address immediate financial gaps without resorting to severe austerity measures that could negatively impact public services and welfare programs.

• Intergenerational Equity:

Borrowing allows governments to distribute the costs of public services and investments across generations. By financing projects through debt, future generations, who are expected to benefit from these investments, share the burden of repayment. This approach reflects the principle of intergenerational equity, ensuring that the costs and benefits of public policies are distributed fairly across different cohorts.

Conclusion:

In conclusion, the government's perpetual need for borrowing money is a complex interplay of economic, social, and geopolitical factors. While critics argue that excessive borrowing can lead to unsustainable levels of debt, proponents assert that responsible borrowing is an indispensable tool for fostering economic growth, improving infrastructure, and safeguarding the well-being of citizens. Striking a balance between borrowing and fiscal responsibility remains a perpetual challenge for governments, requiring careful consideration of economic conditions, public needs, and long-term sustainability. As citizens, understanding the rationale behind government borrowing enables us to engage in informed discussions and hold our leaders accountable for sound fiscal policies.

This article is for educational purposes and not to be regarded as investment advice, a recommendation, or an offer or solicitation to subscribe for, buy or sell any investment product. All forms of investments are subject to risks, including the possible loss of the principal amount invested. Losses can exceed your initial deposit. You should carefully consider your investment experience and objectives, financial situation, and risk tolerance level, and consult an independent financial adviser prior to dealing in any investment products. The contents in the article may have been obtained or derived from public or other sources believed by CMC Invest to be reliable. However, unless otherwise specifically stated, CMC Invest makes no representation as to the accuracy or completeness of such sources or the information, and accordingly accepts no liability for loss whatsoever arising from or in connection with the use of or reliance on the information. Please visit www.cmcinvest.com/en-sg/ for important information. This advertisement has not been reviewed by the Monetary Authority of Singapore.