Debate on size of national debt ignores fundamental issues

[Courtesy]

In recent months, a lot has been said regarding the rise and size of public debt. The reference point of most commentaries is that debt is a financial obligation, which it is. And yet exclusive focus on this reference point obscures a more obvious view point; that debt is also financial instrument. A few examples will help illustrate this point. Individuals borrow, not so much to add burden to their lives, but to improve their long-term net worth. Businesses borrow, not so much to fund present working capital, but also to finance long-term growth.  And nations borrow, not so much to meet current budgetary needs, but more so to enable long-term, national wealth creation.

Debt is therefore more than just financial burden - as expressed in the debt-to-GDP ratio. It is also a vital financial instrument. One that acts as a bridge between today’s hopes and tomorrow’s reality. When debt is used judiciously, it catalyses rapid economic growth. Indeed this is evident if one examines data from around the world. All of the G7 nations have high debt-to-GDP ratios in percentage points; Japan (239.2), Italy (132.6), US (107.4), France (96.6), Canada (92.3), UK (89.2) and Germany (67.6). And most of the BRIC nations (Brazil, Russia, India and China), have above average debt ratios; Brazil (78.3), India (69.5), South Africa (50.5) and China (46.2). Of interest is all of the G7 nations and two of the BRIC nations have higher debt ratios than Kenya.