Impact of Public Debt on the Economic Growth Essay

regime debt is to a fault known as public debt. It is the debt owed by a federal official government to the internal or external sources. It is required when the stocks of government securities be insufficient to cover previous budget deficits. Budget deficits occur when the direct of government costs exceeds its revenues. Based on macro stintingal theory, the level of government use of goods and services must be positive with the scotch growth. The senior higher the spending, the higher will be the economic growth.Government expenditure mess be sepa drift into productive and unproductive expenditure. Productive expenditure will be contributed to the economic growth in a few years time. Meanwhile, the unproductive expenditure will lead to the decline in the economic growth. Productive expenditure comprise of education and health. Besides, the unproductive expenditure consists of expenditure like allowance and subsidies. Meanwhile, high budget deficit will reduce the level of economic growth.In order to finance special expenditures, the government will lift out notes from internal sources. Since the demand of the loanable funds is as well as derived from the private sector, additional demand from the government will boost the post rate. Consequently, high interest rate will distort the level of investment funds. Finally, the lower level of investment will lead to lower economic growth for the country. In addition, high public debt will also result to a financial crisis.If a country is experiencing a trend of an increasing public debt, the investors whitethorn be worried about the capabilities of that country to pay its debt. Apart from that, they will invite for higher interest rate as a safety and useful measures for them to keep financing the deficits. An increase in interest rate can distort the level of economic growth and would create financial crisis. Besides, it is also acts as an obstacle to the development because it will weakens the governments business leader to achieve macroeconomic stability.It comprises the stability of inflation, interest rate and exchange rate target. It will also create adverse incentives associated with future taxes. High debt also will stop the social and developmental progress. Malaysian economy may not be able to achieve high and sustainable economic growth in the long-run if the federal government keeps borrowing money from the domestic sources in order to finance the budget deficit. However, there is no such evidence to conclude that the external debt can distort the economic growth in the long-run.