Is government debt a good or bad thing?

 

The national debt is in Japan is approximately 9.2 trillion dollars or 263% of GDP. Compared to Japan, Britain's national debt pales into insignificance. Yet, the Japanese economy, is the fourth-largest in the world and the country is far richer than Britain. Japan is also a more developed country than Britain with a far better public transport system. 

America is one of the most indebted countries in the world but as one of the most powerful economies in the world.  Despite these levels of debt, I don't think that either Japan or the U.S. are likely to go bankrupt. What matters is whether debt is serviceable i.e. can it be paid back. Economists talk of good and bad debt. Some countries do default on their debts as Russia did in August 1998.

Austerity might be one way of reducing debt but it also damages the economy. Inflation also reduces government debt because it increases the price level and reduces the real value of government debt. But inflation also brings economic problems as it increases the cost of living for consumers and the value of currency diminishes. Another way to reduce debt is by growing the economy because this increases tax revenues and reduces the relative debt burden. This is what Britain did at the end of WWII. In 1946, UK debt stood at 240% of GDP, but the government didn't impose austerity measures. 

I think people should avoid comparing governments with the way in which a family household or a small business is run. Many pension funds invest in government debt by buying government bonds which pay interest. While it might be wise for family households to pay off their debt, it isn't necessarily good for the economy if all consumers did the same thing. It would reduce aggregate demand because people would be spending less. One person's spending is another person's income. If the British government suddenly decided to pay off all its debts, it would crash the economy because it would have to withdraw £1.6 trillion of money from use in the economy.

Britain can't really run out of money because it can always print it, create it electronically, coin it, and issue it. The money is fiat money, a currency that is not backed by a commodity such as gold or silver. But printing more money doesn't necessarily increase economic output, it just puts more money into circulation. If consumers are able to demand more goods but economic output remains the same, firms will increase prices and this will cause inflation.  Britain also as sovereign control over its money supply because it's not in a currency regime like the Euro. If an individual, family, or small business owner started to print their own money, they would be locked up.