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‘The National Debt / GDP ratio has fallen from over 90% during the first half of the 1990’s to an estimated 25.1% at the end of 2006’ - Leaving Cert Economics - Question c - 2007
Question c
‘The National Debt / GDP ratio has fallen from over 90% during the first half of the 1990’s to an estimated 25.1% at the end of 2006’. (National Treasury Management ... show full transcript
Worked Solution & Example Answer:‘The National Debt / GDP ratio has fallen from over 90% during the first half of the 1990’s to an estimated 25.1% at the end of 2006’ - Leaving Cert Economics - Question c - 2007
Step 1
Briefly explain each of the underlined terms.
Answer
National Debt
The National Debt refers to the total amount of cumulative government borrowing that remains outstanding. It represents the government's financial obligations arising from previous borrowing, which must be managed through future tax revenues and expenditures.
GDP
Gross Domestic Product (GDP) is the total monetary value of all goods and services produced within a country's borders over a specified period. This measure indicates the economic activity and health of a nation's economy, including contributions from domestic and foreign-owned production factors.
Step 2
Outline the economic benefits of this changed situation for the Irish economy.
Answer
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Reduced annual interest repayments. With a declining national debt to GDP ratio, the government faces lower annual costs for servicing its debt, freeing up financial resources for other priorities.
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More funds available to the government for current use. By reallocating funds from interest repayments, the government can invest in essential services or development projects beneficial to the economy.
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Reduced burden on future taxpayers. A lower national debt means fewer obligations for future generations, potentially resulting in lower taxation down the line.
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Improved international credit rating. Maintaining a healthy national debt to GDP ratio enhances Ireland's creditworthiness, which can lower borrowing costs for the government.
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Adhering to requirements of the Euro stability pact. A lower national debt can facilitate compliance with the fiscal rules of the Eurozone, reducing the risk of penalties or excessive scrutiny.
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Prudent management of economy by government. A decreasing debt level suggests efficient financial management, fostering investor confidence and economic stability.
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Possible deterioration in public services. In scenarios where debt reduction leads to cuts in borrowing for investment, the government may struggle to maintain or improve public services, which can stifle economic growth.