2. Is having high levels of sovereign debt always a bad thing?
Opposition to high levels of sovereign debt is often associated with the neoclassical and neoliberal school of economics. According to this school of thought, the fundamental job of a government is to maintain a balanced budget; to ensure that government spending does not exceed revenue. Where borrowing is required, these debts should be repaid quickly, including by cutting spending in other areas where necessary.
By contrast, Keynesian and Marxist economists view debt as a useful counter-cyclical tool, with borrowing and high government spending being used to invest in an economy which is sluggish or in recession. Moreover, they view the ability to repay debt as the key issue – and understand that ability to repay is not simply down to the size of the debt, but also to the strength of the economy.
However, in many cases, excessive sovereign debt, and debt repayments, are problematic from a social justice perspective.
The first reason is in cases where the debts which a country now owes were not accumulated fairly. The reasons for this can vary from a lender lending irresponsibly (knowing a country cannot afford the loan), to lenders lending to leaders who are undemocratic, and known to use loans to fuel things such as war, weapons or personal enrichment, or loans which originate in colonialism. More detail on this is provided below in the section on debt crises.
Debts also become problematic when their repayment inhibits governments from investing in public services and economic development. At least 20 governments in the global south spent more than 20 per cent of their revenue to service external debts in at least one of the last five years. In some cases, such as in Angola, Djibouti, Jamaica, Lebanon, Sri Lanka or Ukraine, more than 40 per cent of government revenue was destined for external public debt service at some point between 2014 and 2018.
In 2018, 46 countries spent more on servicing sovereign debt than on their national healthcare budgets. Low income countries (LICs) spend on average 28.5% of their public revenues on debt service, and on average only 2.5% on healthcare services. According to the IMF, government spending on public services in Sub-Saharan Africa will reach a historic low of only one fifth of GDP in 2024 – even though overall debts are projected to increase.
Finally, some kinds of loans, in particular bonds, increase countries’ exposure to the fluctuations of international currency markets, meaning that countries are vulnerable during times of international recession or economic downturn.
Different types of debt create greater and lesser problems. Countries with high debts denominated in their own currencies have more options available as to how to manage it. These options are explored in the FreshUP article on Modern Monetary Theory.
