INTRODUCTION
Public borrowing is an operation through which the government obtains financial resources from
lenders such as banks, citizens, the IMF, the World Bank, or financial markets.
It becomes necessary when government revenues are not sufficient to cover its expenditures. However,
if it is poorly managed, it can become an obstacle to development.
This raises the following question: When is public borrowing useful, and when does it become
dangerous?
In this exercise, we will examine the helpfulness of public borrowing as well as the dangers that may be
associated with it and give by the end a clair example of service best managed by local authorities.
1) When is government borrowing helpful and when is it dangerous?
Government borrowing happens when a country’s government spends more money than it collects
from taxes. To pay for this shortfall, the government sells financial instruments like bonds and bills to
investors. Below are some reasons why government uses to borrow money.
Reasons of the borrowing
Budget shortfalls: Covering day-to-day public costs when tax collection drops or spending rises.
Big projects: Paying for expensive public works like roads, schools and hospitals that help the economy
grow over time.
Crisis support: Stabilizing the country during major emergencies, natural disasters, or economic
recessions.
When it is helpful
Government borrowing is helpful when it funds long-term public investment like infrastructure,
stabilizes the economy during recessions or crises, and spreads the tax cost of major projects across the
generations that will benefit from them. Below are some reasons:
A) Funding Infrastructure and Growth
Builds roads, railways, schools and hospitals that boost future productivity.
Finances investments that the private sector cannot or will not fund on its own.
Generates long-term economic growth that makes the debt easier to pay back later.
B) Managing Crises and Recessions
Provides vital emergency relief during natural disasters, pandemics or wars.
Replaces lost private spending during an economic downturn to stop a recession from getting worse.
Prevents the need for sudden, severe tax hikes or spending cuts that would harm struggling families and
businesses.
C) Smoothing taxes over time
Pays for large, rare capital projects gradually rather than hitting current taxpayers with massive, sudden
bills.
Shares the financial load fairly with future citizens who will also use the public assets.
Reasons why it is dangerous
Government borrowing becomes dangerous when debt grows faster than the economy (GDP), interest
payments consume a huge share of public revenue, money is used for daily expenses rather than
growth, or loans are taken in foreign currencies that makes the country vulnerable to sudden currency
drops.
a – High Interest Costs
Budget squeeze: More tax money goes to pay interest.
Less public service: Less money remains for schools, hospitals, and roads.
Vicious cycle: The government must borrow more just to pay old debts.
b– Crowding out private business
Higher rates: Heavy borrowing pushes up local interest rates.
Fewer jobs: Local businesses lend to the government instead of small businesses.
Slower growth: Private companies cannot afford to expand or hire.
c– Foreign Currency Risk
Currency drops: If a loan is in US dollars and the local money loses value, the debt balance rises
instantly.
Repayment stress: Harder to earn enough foreign cash to pay back lenders.
d– Loss of Market Confidence
Higher yields: Investors demand higher interest rates as they fear default.
Austerity trap: Government are forced to cut spending or raise taxes abruptly, which can crush the
economy.
When is the borrowing is dangerous
The debt becomes too high, making it difficult for the government to repay loans and invest.
Most borrowed money is used for consumption instead of productive investment that generate future
economic benefit.
Interest payment become very large, leaving less money for education, healthcare and other public
services.
It places a heavy burden on future generations who may have to pay higher taxes or receive fewer
public services to repay the debts.
Government borrowing is dangerous when it is excessive, poorly managed or not used for investments
that support economic growth.
2- Example of service best managed by local authorities
Public Sanitation and Hygiene are one of the best service managed by local authorities. In fact, public
sanitation and hygiene are the best managed by local authorities because they understand the
sanitation needs of their community. They organize street cleaning, maintain public toilets, ensure
proper waste disposal, and promote good hygiene practices to protect public health.
For example, a municipal council organizes regular street cleaning, installs public toilets, and carries
out sanitation campaigns to encourage people to keep their environment clean. It helps to prevent
some diseases.
Public sanitation and hygiene are best managed by local authorities because they are directly in
contact with their citizens, and they know exactly what and how to keep the community clean and
healthy.
CONCLUSION
Government borrowing is helpful when it is used wisely to finance productive projects, provide
essential services, and support the economy during emergencies or recessions. It becomes dangerous
when borrowing is excessive, poorly managed, or used for unproductive spending, leading to high
debt, inflation, and financial problems. Therefore, governments should borrow responsibly and
ensure that the benefits outweigh the costs.