What They Tell You

Government debt is a crisis waiting to happen. Countries that spend more than they collect in taxes are living beyond their means. Future generations will be burdened by our debts. Like a household, governments must balance their budgets or face bankruptcy. Austerity—cutting spending to reduce deficits—is responsible policy.

What They Don’t Tell You

Government debt is fundamentally different from household debt. Countries that control their own currency cannot go bankrupt. The danger of cutting deficits too fast is often greater than the danger of deficits themselves. Austerity has repeatedly failed and caused enormous suffering. And debt levels that seem alarming in isolation must be judged in context.

The Household Analogy

Politicians love to compare government finances to household budgets:

“A family has to balance its budget. So should the government.”

But this analogy is deeply misleading:

Currency sovereignty: A government that borrows in its own currency can always pay its debts by creating money. It cannot go bankrupt (though it can create inflation).

Infinite life: Households die; governments don’t. Debt need never be fully repaid.

Counter-cyclical role: When households cut spending, that’s prudent. When everyone cuts spending at once (including government), that’s a recession.

Size matters: A household’s spending doesn’t affect its income. Government spending is someone’s income, which generates taxes.

What Debt Actually Means

Government debt is also government bonds—assets held by savers, pension funds, and banks. One person’s liability is another’s asset.

Who holds government debt?

  • Domestic citizens and institutions (mostly)

  • Foreign investors

  • Central banks

When citizens hold their own country’s debt, the “burden” is a transfer within the country, not a loss to the country.

When Debt Is Dangerous

Government debt can be problematic when:

Borrowed in foreign currency: Then the country can run out of foreign exchange (Argentina, Greece)

Inflation risk: Excessive money creation to pay debts can cause inflation

Crowding out: If government borrowing raises interest rates, private investment may fall

Sustainability: If debt grows faster than GDP forever, eventually there’s a problem

But none of these mean that debt is automatically bad or that cutting deficits is automatically good.

The Austerity Track Record

After 2008, many countries pursued austerity—cutting spending to reduce deficits. The results:

UK: The slowest recovery in modern history. Living standards stagnated for a decade.

Eurozone: Prolonged recession, mass unemployment (over 50% youth unemployment in Greece and Spain).

Latvia, Ireland, Portugal: Economic contractions as severe as the Great Depression.

The fiscal multiplier: The IMF admitted it had underestimated how much austerity hurts growth. Cutting spending didn’t reduce debt ratios because GDP fell faster than debt.

The Lesson of Japan

Japan has the highest debt-to-GDP ratio among developed countries—over 250%. Yet:

  • Interest rates remain near zero

  • No inflation crisis

  • No bond market panic

  • The economy functions

Japan shows that high debt doesn’t automatically lead to disaster.

The Real Crisis Is Often Austerity

Cutting deficits in a recession:

Reduces demand: Government spending is someone’s income

Raises unemployment: Less spending means fewer jobs

Cuts public services: Healthcare, education, infrastructure suffer

Harms the vulnerable: Welfare cuts hurt those who need help most

Doesn’t even reduce debt: Lower growth means lower tax revenue

The debt-to-GDP ratio can rise even as deficits fall if the denominator (GDP) shrinks.

The Interest Burden

What matters for sustainability is not debt but interest payments:

  • If interest rates are low, even high debt is sustainable

  • If growth exceeds interest rates, debt ratios fall over time

  • Central banks can keep interest rates low (and have)

Currently, despite high debt, interest burdens in most rich countries are historically low.

What Should Government Do?

In recession: Borrow and spend. The worst time to cut spending is when the private sector is also cutting.

With low interest rates: Borrow to invest. If the return on public investment exceeds the borrowing cost, it’s profitable.

For the long term: Focus on growth, not debt. A growing economy makes any debt level manageable.

Consider inflation, not debt: If inflation rises too much, then worry. Until then, other concerns matter more.

Who Benefits from Deficit Hysteria?

The austerity agenda serves certain interests:

Wealth holders: Fear inflation, which erodes the value of their bonds

Tax cutters: Use debt fears to argue against spending (but not against tax cuts)

Privatizers: Use fiscal stress to justify selling public assets

Small-government ideologues: Use deficits as an excuse to cut programs they oppose anyway

The Bottom Line

Government debt is a real thing that requires management. But the panic over debt levels has caused far more harm than debt itself.

The real fiscal irresponsibility is not borrowing—it’s refusing to borrow when borrowing is cheap and the economy needs support. The obsession with balanced budgets is itself a form of economic illiteracy.