UK fiscal policy: Bad debts (Economic Insight)

By Lucy O’Carroll, Chief Economist – Investment Solutions, Aberdeen Asset Management

Public debt burdens are now higher in many of the advanced economies than they have been for 40 years. This may not be much of a surprise following a financial crisis in which government revenues fell and welfare spending and bank bailouts took priority over fiscal probity, but is it a problem?

A build-up in public debt creates two types of fiscal concern. First, if debt is already high when shocks occur, governments may face rising borrowing costs as risk premiums increase. In extreme cases, as the peripheral economies found during the eurozone crisis, countries can be shut out of debt markets altogether. In addition, high levels of public debt can weigh on future economic prospects, to the extent that rising tax rates implemented to pay down such debt create disincentives to work or invest.

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