In this article, we will summarize the subject of deficits and liabilities for an economics course. Deficits and debts are important indicators of a country's public finances. Deficits occur when a country's revenues are less than its expenses. Debts, on the other hand, are loans taken by a country to cover its deficits.
Causes and consequences of deficits
Reasons for the deficits include:
- Increase public spending to stimulate economic growth
- Decrease in tax revenues or widespread tax evasion
- Increase in social security and health expenditures
- Increase in defense and security spending
- Providing emergency assistance in natural disaster or crisis situations
The consequences of the deficits are:
- Increasing debt stock and interest burden
- Deterioration of budget discipline and loss of confidence
- Rising inflation and exchange rate pressure
- Decrease in investment and savings rates
- Increasing dependence on external financing
Types and management of debts
Types of debts can be classified as:
- Domestic debt: A country's debt to its own citizens or institutions. It is usually issued in the form of government bonds or treasury bills.
- Foreign debt: It is the debt given by a country to foreign countries, organizations or individuals. Usually paid in foreign currency.
- Public debt: It is the total debt of a country's central government, local government and social security institutions.
- Private debt: It is the debt of a country's private sector entities or households.
Debt management is for the following purposes:
- Maintaining the debt stock at a sustainable level
- Having a suitable structure in terms of maturity, interest and currency of the debt
- Using debt to support economic growth and stability
- Reporting the debt in a transparent and accountable manner