Governments all over the world actively participate in production, as well as regulation within particular branches of human activity. Although states’ policies, methods and coverage vary, they all face the same matter – the question of financing those actions. As the tax revenue does not reimburse all costs, the government has to find other sources of capital.
The two primary methods of obtaining the necessary capital are: issuing governmental bonds (borrowing capital from the private sector followed by a promise of repayment with future tax revenues) and debt monetization (printing additional money, which is directly or indirectly used to cover up additional costs). These tactics are generally used simultaneously.
Most economists agree that governmental debt which does not exceed 50% of gross domestic product is scarcely adverse for the economy. Nevertheless some researchers try to prove a salutary impact of such debt on real GDP.
The higher the debt, the more issues arise. Those include the “crowding out effect”, negative consequences of inflation and higher debt interest payments (implied by the higher risks connected with payoff), which lead to higher aggregated debt servicing.
Many legislative acts in particular states hold a limit for national debt or even prohibit enacting the government budgets with a deficit. Nevertheless, governments may try to overcome those restrictions by “hiding” some of their liabilities through transfers of debt from the central government to state-owned enterprises (SOEs).
High indebtedness can be a factor making global economy and finances unstable. Some economists present debt as one of the primary causes of the crisis of 2008 and its sustained effects.
We encourage all of you, future delegates, to participate in the noble conference of Wrocław Model United Nations 2017 and become a part of the prestigious and reputable committee, which Economic and Financial Committee definitely is.
Michał Bazan and Jakub Sawina
Chairs of Economic and Financial Committee