When countries present yearly budgets they often come in surplus meaning they plan to spend more than their planned revenue
Although most of this spending is really important because they help grow the economy and increase aggregate demand which boosts the GDP of the nation.
The government's main income comes from taxes and other Sources, but it's never enough to cover
expenses. For example, if the government collects $5 trillion in taxes but needs about $8 trillion to fund education, healthcare, and public services. That leaves a $3 trillion gap.
So, what does the government do
- Cut spending? That means fewer services, bad education, and underfunded healthcare.
- Raising taxes? That makes life harder for the citizens and might lead to serious protests.
Therefore the easiest solution is borrowing money
to cover the deficit.
Another reason for borrowing is to invest in growth, countries needs roads, schools, and hospitals, but if the government has no money and
refuses to borrow. Instead of building them now,
The government would have to wait years to save up.
Why presently, people will struggle with bad roads, lack of schools, and poor healthcare. But if the
The government decides to borrow, they can build these things now, helping people immediately and improving the economy faster.
This can bring investments and grow the
economy, which in turn increases tax revenue and
eventually make it easier to pay off the debt later.
handling crises and emergencies is one of the reasons the government borrows money Sometimes, governments have no choice but to borrow. When unexpected events like wars, crises, natural disasters, or pandemics happen.
For example, in 2020, the U.S. borrowed $3.8 trillion which is about 18% of its GDP, for COVID-19 relief.
The government also borrows to pay off existing debt.
Therefore governments need to borrow money because they can't just print more money, because just as in the past when the governments print money mindlessly, they think they have unlimited money and will spend recklessly, flooding the economy with cash. This will cause serious hyperinflation, making prices skyrocket, and crash the economy.
As a result, investors and foreign countries will lose trust in that economy and in Today's world trust is non negotiable and think of the
Cases like This already happened in Venezuela and Zimbabwe.
On the other hand, borrowing keeps the government disciplined because debt comes with some kind of interest, this forces the government to manage their money more responsibly as they
need to repay the debt with interest