Debt sustainability and Fiscal Councils Essay Example | Topics and Well Written Essays - 2500 words

Debt sustainability and Fiscal Councils - Essay Example The most obvious reasons of rising government debt are the failure to collect enough taxes or revenues in order to meet the expenditure of the government. Economists argue that if the level of government deficit is very high then it implies that the government will be unable to spend a similar amount in the future (Euro Economics, 2015). The following equation captures the debt to GDP ratio in a comprehensive manner.Growth rate of debt to GDP ratio= primary deficit/ B + i –growth rate of nominal GDPB= nominal quantity of government bondsi= nominal rate of interestPrimary deficit= This measures the total budget deficit of the government minus the amount that has to be paid as interest on the debt.The equation above shows that there are three main factors which can cause very high level of government deficit (Abel and Bernanke, 2005). The first one is a very high deficit spending on the part of the government. The second one is an increase in the rate of nominal interest on the debt that has been collected on the part of the government and third is a sluggish economic growth. Falling rates of interest has contributed to a high level of debt as it became easier to finance the operations of the government through debt instruments. A rise in the propensity of savings in the emerging markets has been found to be a major factor which has contributed to the fall in the interest rates. Finally, preferential treatment of payment of interest on debt has been found to be a contributing factor.