When it comes to government debt, opinions are split. Some say it is a necessary evil, while others paint it as the ultimate economic villain. However, beyond the negative connotations, what if there’s more to the story?
Sure, too much debt can be troublesome, but let’s not overlook the benefits of borrowing responsibly. Moderate levels of borrowing can actually fuel economic growth by funding important projects like fixing roads, improving schools, and investing in research, all of which pay off big time in the long run.
“Moderate levels of borrowing can actually fuel economic growth by funding important projects like fixing roads, improving schools, and investing in research, all of which pay off big time in the long run.”
But here is the kicker: what is considered “moderate” debt varies from country to country. In Nigeria, for instance, there is a legal limit called the debt ceiling, set by the National Assembly. As of February 2023, it capped government debt at 40 percent of the gross domestic product (GDP).
Now, let’s address the elephant in the room: the fear surrounding government debt. It is often portrayed as the big bad wolf, threatening to wreck the economy and burdening future generations with massive debts. But is it really as scary as it seems?
Read also: Yields on Nigerian government debts spike after rate hike
Not necessarily. Think of government debt like a tool—it can be used for good or for bad. When used wisely, it can kickstart economic growth and benefit society as a whole. But when mismanaged, it can spell trouble—it is a two-edged sword, so to speak.
So, before writing off government debt as the villain of the economic story, it is imperative to take a closer look. Maybe it is not the boogeyman we have been led to believe—maybe it is just another piece of the puzzle in the complex world of economics.
For the sake of clarity, it is therefore noteworthy to delve into the analysis of countries that have successfully utilised moderate and high levels of government debt to stimulate economic growth and development and countries that have spell trouble due to mismanagement, other things being equal.
Nigeria
The data reflects a concerning trend in Nigeria, with increasing debt-to-GDP ratios coinciding with rising unemployment and inflation rates. This suggests economic challenges, including potential fiscal strain, reduced purchasing power, and hindered job creation, necessitating robust policy measures to address structural weaknesses and promote sustainable economic growth.
Alawode Olugbenga, an information and technology economist, echoed this sentiment, stating, ‘Despite rising debt-to-GDP ratios in Nigeria, prudent borrowing for infrastructure and social development can spur economic growth. Effective debt management, coupled with targeted investments, can mitigate risks and foster sustainable development in the country.’
South Korea
In South Korea, government debt has been strategically used to fuel investments in critical areas such as infrastructure, education, and technology. Despite its debt burden, South Korea has managed to maintain a healthy debt-to-GDP ratio of about 49.16 percent, according to data from Statista, ensuring fiscal sustainability while driving economic growth and development.
The South Korean government’s investment in infrastructure is exemplified by the development of a high-speed rail network, which has revolutionised transportation within the country. By connecting major cities and reducing travel times, this initiative has not only enhanced mobility but also stimulated economic activity across various regions.
Moreover, South Korea’s focus on education and research has been instrumental in propelling the nation to the forefront of global technology and innovation. Investments in education have fostered a highly skilled workforce, while funding for research and development has fueled advancements in key sectors, including electronics, automotive, and biotechnology.
This is further confirmed by the Global Innovation Index (GII) rankings, which indicate varying levels of innovation capability among countries. South Korea ranks 10th among the 132 economies featured in the GII 2023. This reveals the commitment of South Korea to education and research, which is currently yielding good fruits.
Despite the significant investments financed through government debt, South Korea has maintained a debt-to-GDP ratio within manageable levels. This prudent fiscal management has ensured that the benefits of borrowing outweigh the potential risks, positioning South Korea as a model for effective utilisation of government debt to drive sustainable economic growth and development.
As South Korea continues to prioritise strategic investments and innovation, its prudent approach to managing government debt serves as a testament to the country’s commitment to long-term prosperity and competitiveness on the global stage.
Japan
In Japan, for more than two decades, Japan’s national debt has floated above 100 percent of its GDP. In fact, as of the second quarter of 2022, Japan’s debt-to-GDP ratio was 226 percent, as reported by the Federal Reserve Bank of St. Louis.
According to the data from macrotrend and the World Population Review, as of 2023, the issue of government debt has garnered significant attention, with the nation holding one of the highest debt-to-GDP ratios globally, exceeding 250 percent. Despite this considerable burden, Japan has managed to sustain its borrowing thanks to several key factors that underpin its financial resilience.
One crucial factor contributing to Japan’s ability to manage its high debt levels is its robust domestic savings rate. Japanese households and businesses have historically maintained high savings rates, providing a stable source of funding for government borrowing.
This domestic savings pool has helped mitigate the need for excessive reliance on foreign investors and has contributed to the stability of Japan’s bond market.
Additionally, Japan benefits from the stability and depth of its bond market, which is one of the largest in the world. The Bank of Japan’s aggressive monetary policy measures, including large-scale asset purchases, have helped to keep borrowing costs low and ensure liquidity in the bond market. This has facilitated the government’s ability to finance its debt at relatively affordable rates, despite the high debt-to-GDP ratio.
However, while Japan has managed to sustain its borrowing in the short term, the long-term sustainability of its debt remains a subject of debate and concern. The ageing population and declining birth rates pose significant challenges to Japan’s fiscal outlook, as they strain social welfare systems and reduce the tax base. Addressing these structural issues will be essential for ensuring the long-term sustainability of Japan’s debt levels and safeguarding the country’s financial stability.
Nevertheless, Japan’s ability to navigate its high debt-to-GDP ratio thus far demonstrates its resilience and adaptability in managing fiscal challenges. As the government continues to implement measures to address demographic and economic challenges, Japan remains a notable case study in the complexities of managing high levels of government debt while maintaining financial stability.
Brazil
In Brazil, government debt has been a central topic in economic policy and development discussions. With a debt-to-GDP ratio of around 90 percent, Brazil has engaged in significant borrowing to fund various initiatives aimed at addressing social needs, driving infrastructure development, and stimulating economic growth.
The country’s borrowing reflects a commitment to funding essential programmes and projects aimed at improving citizens’ lives.
Investments in social programmes like Bolsa Família, which provide cash transfers to low-income families, have notably contributed to poverty alleviation and reduced inequality. Data from the Brazilian Institute of Geography and Statistics (IBGE) indicates a drop in the poverty rate from 36.7 percent in 2021 to 31.6 percent in 2022, showcasing the impact of these initiatives.
Moreover, infrastructure development efforts, including investments in transportation networks and energy infrastructure, aim to enhance connectivity and foster long-term economic growth.
Despite economic challenges and occasional political instability, Brazil has shown resilience in managing its debt while sustaining economic growth. Despite economic fluctuations, the country has made progress in reducing poverty levels and improving social indicators, largely due to government interventions financed through borrowing.
However, Brazil’s high debt-to-GDP ratio poses challenges, including potential fiscal imbalances and susceptibility to external shocks. The sustainability of Brazil’s debt levels hinges on effective borrowing management, the implementation of structural reforms to boost productivity and competitiveness, and addressing fiscal vulnerabilities.
So far, strategic borrowing by governments can yield significant long-term benefits for society by funding projects and initiatives that promote economic growth, enhance infrastructure, improve social welfare, and advance sustainable development goals. However, effective management of debt is crucial to ensuring fiscal sustainability and minimising the risks associated with borrowing.
A few countries that have spelled trouble due to debt crises
Greece
In the early 2010s, Greece faced a severe debt crisis, with a staggering debt-to-GDP ratio peaking at over 180 percent. The crisis triggered widespread austerity measures and multiple bailouts from international creditors to prevent economic collapse. Despite challenges, Greece has made progress in addressing fiscal imbalances and implementing reforms.
According to the European Commission, Greece’s debt-to-GDP ratio declined from 180 percent to 165.5 percent by the end of the third quarter of 2023, but is still the highest in the European area, with further decreases projected for 2024.
While Greece’s debt crisis serves as a cautionary tale about the dangers of unsustainable borrowing and fiscal mismanagement, it also underscores the importance of implementing sound economic policies, fostering fiscal discipline, and addressing structural weaknesses to build a resilient and sustainable economy in the long term.
As Greece continues its journey towards economic recovery and stability, the lessons learned from the debt crisis will remain relevant for policymakers and economists around the world.
Italy
Italy, a significant member of the Eurozone, currently faces a substantial debt-to-GDP ratio exceeding 140 percent as of the third quarter of 2023, according to data from the European Commission. This places Italy as the second-highest debtor within the Eurozone, following closely behind Greece.
The considerable level of debt in Italy has sparked concerns regarding the country’s fiscal stability, particularly given its sluggish economic growth and political instability. Despite being one of the world’s largest economies, Italy has struggled to stimulate significant economic expansion, contributing to doubts about its ability to generate enough revenue to service its debt obligations.
The implications of Italy’s high debt-to-GDP ratio extend beyond domestic concerns and have broader implications for the stability of the Eurozone and the global economy. As such, Italian policymakers face the challenge of implementing measures to boost economic growth, enhance fiscal discipline, and reduce reliance on debt financing.
Structural reforms aimed at improving productivity, reducing bureaucracy, and fostering innovation are crucial components of Italy’s strategy to address its fiscal vulnerabilities and revive economic growth. However, achieving fiscal sustainability while promoting inclusive and sustainable economic development requires a delicate balance between austerity measures and growth-oriented policies.
As Italy navigates its fiscal challenges, strong leadership, vision, and decisive action from policymakers will be essential to implementing necessary reforms and laying the groundwork for a brighter economic future.
Samuel Sule, chief executive officer of Renaissance Capital, said debt is leveraged to meet the government’s objectives, adding that what the proceeds are used for makes the borrowing justifiable.
“Use of proceeds counts. What are you borrowing for? Is it infrastructure, social welfare, or recurrent expenditure?” he questioned.
Sule noted that where the government is deploying its borrowings has the potential to make the extra money impactful. “It is not sustainable to borrow money to service debts,” the economic analyst said.
One of the most iconic examples of government debt financing leading to tangible benefits is the construction of the Interstate Highway System in the United States.
The Global Innovation Index (GII) rankings indicate varying levels of innovation capability among countries, with Nigeria ranking lower at 109 out of 132 economies, while South Korea, Japan, and Italy demonstrate stronger innovation prowess.
Economically, higher GII positions correlate with greater potential for economic growth, technological advancement, and competitiveness. Therefore, countries positioned lower may face challenges in fostering innovation-driven growth, requiring strategic investments in research, education, and infrastructure to enhance innovation ecosystems and spur economic development.
By learning from the successes of nations that have leveraged borrowing wisely, policymakers can chart a course towards sustainable growth, equitable development, and a brighter tomorrow.
Through prudent fiscal management, innovative investments, and a steadfast commitment to public welfare, governments can harness the power of debt as a force for good, shaping a world where prosperity is not a distant dream but a tangible reality for all.
Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).
Wasiu Alli is a business and finance journalist at BusinessDay who writes about the economy, business trends, and politics. He holds a BA. Ed. and M. Ed. in English Language and Education.
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