National Debt (Junior Cert Business Studies): Revision Notes
National Debt
What is national debt?
When a government plans to spend more money than it expects to receive in income, this creates what's called a deficit budget. To fund this shortfall, the government must borrow money from various sources.
National debt is the total amount of money borrowed by a country's government to fund its operations and public services.
The government can borrow money from two main sources:
- Domestic creditors - borrowing from within the country (domestic debt)
- Foreign creditors - borrowing from other countries or international organisations (foreign debt)
How is national debt calculated?
National debt is calculated using a simple formula:
This means we add together all the money the government has borrowed from sources within the country plus all the money borrowed from foreign sources.
Ireland's national debt in practise
To understand how significant national debt can be, let's look at Ireland's situation as a real-world example.
According to the Central Statistics Office, in 2019:
- Ireland's national debt was equivalent to €44,365 owed by every single person in the country (men, women and children)
- The country was paying €14 million in interest on this debt every single day
- This daily interest payment alone shows the enormous scale of the debt burden
These figures demonstrate how national debt affects every citizen, even though individuals didn't personally borrow the money. The debt burden is shared across the entire population.
How is national debt measured?
Most countries around the world have some level of national debt, and this debt typically grows year after year. To make meaningful comparisons and assessments, national debt is usually measured as a percentage of the country's GDP (Gross Domestic Product).
This percentage helps economists and governments understand whether the debt level is manageable compared to the size of the economy.
Impact of national debt on the economy
National debt creates several significant effects on individuals, businesses and the overall economy:
Effects on taxation and income
- Taxes may increase to help service the debt, leaving people with less disposable income
- Businesses face reduced profits due to higher tax burdens
Effects on business and employment
- Less money available for the government to encourage new enterprises and job creation
- The economy becomes less competitive as resources are diverted to debt payments
Opportunity cost
Understanding Opportunity Cost
There is a major opportunity cost involved with national debt. The money used to pay interest on debts could instead have been invested in:
- Healthcare services
- Education programmes
- Infrastructure projects
- Other essential public services
This means that high national debt can prevent a country from investing in its future growth and development.
Key Points to Remember:
- National debt occurs when governments spend more than they earn, requiring them to borrow money
- National debt = domestic debt + foreign debt
- Ireland's 2019 national debt equalled €44,365 per person, with €14 million paid daily in interest
- High national debt can lead to increased taxes, reduced government investment, and fewer opportunities for economic growth
- The opportunity cost of servicing debt means less money available for essential services like healthcare and education