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- 4 Marks
Question
Public debt is an important source of revenue for a government to finance public spending where taxation capacity may be limited, or when the alternative would be to print money and compromise macroeconomic stability. There are, however, negative consequences of high public debt on the economy.
Required:
Evaluate FOUR (4) of such negative consequences of public debt on the economy of Ghana.
(4 marks)
Answer
- Tax Burden: Higher public debt results in the need to impose additional taxes to service the debt, which can reduce incentives to work and save. This tax burden can also lead to income redistribution from the poor to the rich, as bondholders (often wealthier individuals) receive interest payments funded by taxes.
- Higher Interest Rates: Increased public debt can lead to higher interest rates as the government competes with the private sector for borrowed funds. This makes borrowing more expensive for everyone, stifling private investment and economic growth.
- Stifling Economic Growth: Public debt diverts capital from the private sector to the public sector, reducing the funds available for productive investment. This can slow down economic growth and lower the overall standard of living.
- Negative Impact on Long-Term Investment: High public debt can discourage long-term investment due to the uncertainty it creates. Investors may demand higher returns to compensate for the perceived risk, leading to higher long-term interest rates and further slowing economic growth.
- Tags: Economic growth, Economic Impact, Interest rates, Public Debt, Taxation
- Level: Level 3
- Topic: Tax planning
- Series: MAY 2019
- Uploader: Cheoli