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Over the last decade, some countries have been accumulating debt at a relentless speed and have been struggling to pay back its interest with the governments budget. In the UK, the budget of 2024-2025 (obr.uk) shows that government spending on healthcare and education far exceeds the spending on debt interest (see figure 1). However, statistics show that for countries such as Japan (see figure 2), the government budget heavily focuses on servicing government debt, and the education and medical health care are abased. I am writing this letter to propose a two polices approach global economic leaders may implement to reduce total government debt whilst continuing to advocate for economic growth and spending on merit good.

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Figure 1, source: D.Clark, May 24th 2024, budgeted public sector

expenditure on services in the UK 2024/25 by function

Firstly, governments world wide needs to recognize that they should not solely focus on reducing government debt, instead understand that debt interest payment should be reduced, or controlled, relative to the economic growth rate (GDP growth rate). This is justified as if the interest rate on the national debt is lower than the rate of GDP growths, the government can borrow new money to pay of its previous debt whilst also investing more money to promote economic growth.

By introducing expansionary monetary policies, economic growth can be promoted at a higher rate relative to the national debt. The primary expansionary monetary policy is to reduce the central bank interest rate, by lowering the central bank interest rate (followed by lowered commercial bank interest rate) it will encourage borrowing and spending (1, A.Tomas, 2017) as the cost of borrowing are now lower and the rewards of saving are also lower.

 By decreasing the interest rate, businesses are more willing to take out loans to finance for investment projects as the cost of borrowing money is significantly lower. With increasing investments, the research and development of capitals, technology and machines are likely to accelerate, or the country now can financially afford more technological advanced machines with will improve the productivity and efficiency. By acquiring more efficient machines it will not only reduce the cost of production by minimizing waste and unnecessary materials, it will also increase the total production and aggregate supply of the​​​ countries, researchgate.net

industry (2, European Central Bank, 2017). This, by evidence, will firstly make its product more accessible to the local consumers, increasing the standard of living by reducing the price of the product, and secondly, make its product more price competitive in the global market, which can increase exports and increase money supply of the economy, escalating the GDP growth (see figure 3), as illustrated by shifting L0 to L1, the Real GDP per hour of labour rises from Y1 to Y2 .

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Additionally, with higher aggregate supply and profit, the government will gain more corporate tax revenue which can be allocated to either pay off the national debt interest or to further subsidies and promote economic growths and development. However, there will be concerns with surging inflation rate (3, J.Ross, 2022) being complementary alongside this monetary policy, and it shall be addressed with the next proposed policy.

 

The second proposal is to implement globally is a supply-side policy of market liberalization, to increase the competitiveness in an economy with deregulation. Deregulation will lower the ‘barrier of entry’ which will allow more start-up firms to enter the industry, this can be further enhanced with government subsides on firms with higher opportunities to succeed; by having higher competitiveness within an industry, market monopolies are less likely to occur. By reducing market monopoly’s power, there will be less price dictation by the largest firm, instead the price will be at equilibrium with the supply and demand of the economy. By having higher competition within a domestic market, it will not only reduce the total inflation from firms cutting prices to be more competitive, the goods will also be more internationally competitive with its lowered prices. Having a trade surplus, or lowered trade deficit, will increase the GDP growth (4) (GDP=C+I+G+(X−M)) which will lower the government debt interest relative to the GDP growth whilst combating the potential rising inflation rate from proposal one.

 

The proposal of market liberalization could also initiate the “Economic Multiplier Effect”, which refers to the process by which an initial increase in economic activity leads to further increase in economic activity. As the products of one country become more globally price competitive, there will be more foreign purchases of those product, this immediate boost in sales will direct contribute to the GDP, this could lead to starting a ‘chain reaction’ of increasing supply chain extension which will increase the demand for labour leading to increase income tax revenue which can be directly contributed to paying of the debt or to further boost economic growth with merit goods such as education and medical benefits. This economic multiplier effect will, most importantly, receive more domestic and foreign investment (see figure 4), an example is the 1990s “Dot-com era boom” in the US market. The investment in tech companies created many high-paying jobs, leading to increased consumer spending, this success also led to the development of supporting markets such as the hardware industry and internet service. This boom in economic activity had widespread effects including increased tax revenue and increased investment in infrastructure and merit goods.

 

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Figure 4, source: G.M.Pureza, May 21st 2024, “Dotcom Bubble”

 

As countries continue to pay off national debt interest, the importance of growth of GDP and government expenditure on merit goods cannot be overstated. Overall, I believe these two policies will greatly benefit countries with high rates of expenditure on debt interest who seeks to prioritize economic development along with reducing national debt interest, I hope to hear your insight on these two proposals.

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Bibliography

 

1. Araujo Tomas, 2017,  "Does Lowering the Interest Rate Stimulate Economic Growth? An Analysis of Current Macroeconomic Policy" . Honors Undergraduate Theses. 206. https://stars.library.ucf.edu/cgi/viewcontent.cgi?article=1220&context=honorstheses

2. European Central Bank, June 27th 2017, “Does innovation lead to economic growth?”

3. Jenna Ross, July 4th 2022, “Interest rate hikes vs inflation: How are different countries doing it?”, World Economic Forum, https://www.weforum.org/agenda/2022/07/interest-rate-hikes-inflation-rate-economy

4. Bela Belasa, 1978,  “Export and Economic Growth: Further Evidence”,  Preprint from Journal of Development Economics 5, https://documents1.worldbank.org/curated/en/885061468172751335/pdf/REP68000Export0h000further0evidence.pdf

5. Gabriel M. Pureza, May 21st 2024, “Dotcom Bubble”, Wall Street Mojo, https://www.wallstreetmojo.com/dotcom-bubble/#h-dotcom-bubble-effect-on-the-economy

6. Johnna Montgomerie, April 4th 2019, “How UK Austerity is Made: Economic Story Telling About Debt”, LSE BPP, https://blogs.lse.ac.uk/politicsandpolicy/economic-storytelling-about-debt/