What Effects Does the National Debt Have on the Average Consumer?

Turn on the TV, and you may well see an array of knowledgeable talking heads pontificating gravely on matters macroeconomic. Righteous indignation against the size of the national debt is certain to form a part of their analysis. “OK,” you think, “I get how this is important as part of the big picture. But why does it matter to me?”

To answer this, it’s important to know what the national debt is. Simply put, it’s the total amount of money that the national (not local) government has borrowed. In contrast, the deficit is the amount of money a government borrows in one year – this gets added to the national debt. The national debt is not the total amount of money owed by consumers – that is, ordinary people like you and me. It’s only money owed by the government. This money can be owed to anyone: individuals, banks, pension funds, etc.

So how does big spending by the government affect you? It may seem like it’s on a different level to everyday life, but remember – that debt has to be paid by you. So the first effect of the national debt on you as a consumer is that eventually either your taxes will go up to pay the interest on it, or the government will cut its spending while keeping taxes the same, meaning you have to pay for things the government gave you for free before. Either way, you lose some of your income because of the national debt.

The other effects of national debt involve the price of money. This is just the cost of getting money now, i.e., the cost of borrowing. The thing is, different people and businesses have different credit ratings. If you’re earning $200,000 a year, then most banks will be happy to lend you money – say $5,000 – at a low-interest rate because they expect you to be able to pay it back. And the same applies to governments.

The difference is that governments are considered to be the safest borrowers in an economy. As the national debt increases, lenders become less sure that it will be able to pay them back, so they increase their rates to cover this possibility. This, in turn, increases the cost of everyone else’s borrowing, because the government is still considered to be the safest borrower in the economy, and so the rate of interest for the government serves as a baseline for rates of interest for all other borrowers.

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