Why should we be intrested in public debt?
For most of us, public debt, reaching almost trillion of Polish zloty and still rising, is an abstract amount. However, we should be aware that what is happening with public debt has a strong impact on our economy and thus, on our standard of living.
First of all, the bigger the debt, the greater the risk of the public finance crisis. Such crisis means a GDP slump, rise in unemployment and lower wages for those who keep their jobs. It cannot be pointed where exactly the threshold for safe public debt lies. This value varies, depending on the situation in the economy and in financial market sentiment. These issues were highlighted by a crisis in the euro zone – before 2008 investors didn’t hesitate to lend money to Greece, Spain, Slovenia or Hungary; then they revised their evaluation, and these countries deepened in crisis. Nevertheless, the lower the public debt ceteris paribus, the safer the country is.
Secondly, unsound public finances and resulting public debt constitute drag on economic growth. This is particularly important, because, despite the successes of last 25 years, Poland is still the sixth poorest country In European Union. If we want to achieve the standard of living of the rich countries of Western Europe, we need to keep GDP growth high. Meanwhile, poor condition of public finance, visible by the permanent deficit and high level of debt, contribute to the situation when savings of households are spent on huge governmental financing needs. As a result, we are able to pass less capital for future generations. Moreover, high level of public debt causes Poland to be perceived as a more risky country. This discourages foreign investors. Those who decide to invest in Poland expect higher interest as a compensation for the risk. As a result, Polish companies seeking for funds to grow are forced to pay more which limits the opportunity to grow.
In 2010 in Warsaw, as FOR, we launched the public debt clock in order to constantly remind about the state of public finance. When Polish citizens listen to promises of politicians, particularly those referring to higher public expenditures, need to remember not only about direct consequences but also about hidden costs. It is easy to promise higher benefits, allowances etc., although it is harder to admit that they indicate faster growth of public debt and as a result, slower economic growth which means lower wages and lower standard of living.
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