Time to Increase PNG’s Debt to GDP ratio to its “Optimal Level”

By Government Insider

In a previous article, we raised a question “Is PNG bankrupt“? and we compare its debt-to-GDP ratio with other countries. This article follows from the previous one……

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Few issues in politics and economics are nowadays more discussed – and less understood – than public debt. Many raise their voices to urge for reducing the debt, but few explain why and in what way reducing the debt would be conducive to a better economy or a fairer society. And there are no limits to all the – especially macroeconomic –calamities and evils a large public debt is supposed to result in – unemployment, inflation, higher interest rates, lower productivity growth, increased burdens for subsequent generations, etc., etc.

People usually care a lot about public sector budget deficits and debts, and are as a rule worried and negative. Drawing analogies from their own household’s economy, debt is seen as a sign of an imminent risk of default and hence a source of re-probation. But although no one can doubt the political and economic significance of public debt, there’s however no unanimity whatsoever among economists as to whether debt matters, and if so, why and in what way. And even less – one doesn’t know what is the “optimal” size of public debt.

papua-new-guinea-gross-public-debt-percent-of-gdp

Insert: PNG Debt to GDP ratio since 1997

Through history public debts have gone up and down, often expanding in periods of war or large changes in basic infrastructure and technologies, and then going down in periods when things have settled down.

Public debt is not like private debt. Government debt is essentially a debt to itself, its citizens. Interest paid on the debt is paid by the taxpayers on the one hand, but on the other hand, interest on the bonds that finance the debts goes to those who lend out the money.

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few asks the question if maybe there is also a problem if public debt becomes too low.

Whatever the problems of low public debt or high public debt, most economists would agree that the optimum level of indebtedness would be 50%…….maybe it’s time Papua New Guinea increase theirs as well.

 

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