Public debt of Togo: an attempt to identify the explanatory factors

4.1.2.2 Consequences, motives and effectiveness of public debt

4.1.2.2.1 Consequences of public debt

4.1.2.2.1.1 Economic consequences

A large debt is usually accompanied by higher funding costs, which are reflected in turn by a higher debt service. Notwithstanding the risks to future economic conditions, the importance of debt service limits the margin of maneuver of the government. It takes up a large share of fiscal revenues and thus limits the government's spending choices.

In a small open economy, public deficits and debt service reduce public savings, which requires a greater reliance on foreign savings or foreign direct investments. This results in a reduction in trade surplus, or systematically, increasing trade deficits. This is why economists often refer to public and trade deficits as «twin deficits». the real effects of public debt are however less important in a small open economy than in a large open economy or in a closed economy, where the reduction in public savings leads to higher real interest rates and lower private investments (crowding), which in turn affects the growth of the capital stock and ultimately, the potential output.

According to the Ricardian equivalence, public debt is accompanied by an increase in private savings which offsets the reduction in public savings, households anticipating future tax increases and saving accordingly. Ricardian equivalence as well as the interest rate parity in small open economy is limiting the extent of actual macroeconomic impacts of public debt;

4.1.2.2.1.1.1 Economic effectiveness problems

High public debt results in a high tax burden. This high tax burden acts as a break and causes a slowdown in economic activity. Another effect is the potential impairment of the performance of the tax base for the government (avoidance, tax evasion) and uncertainty about future tax conditions and scope of public services that will be available in the future. This uncertainty may adversely affect the retention and attraction of the workforce and capital.

When used appropriately, public debt as a means of financing public investments is a fairness factor.

However, it may become a factor of inequity when used to shift the burden of current spending onto future generations of taxpayers^12(*). Public debt also has potentially important distributional impacts not only between generations but also between members of the same generations (Osberg, 2004).

4.1.2.2.1.2 Social and political consequences

Public debt and the many problems it can cause are likely to influence the political landscape. For example, a problem that can arise is the difference between the taxes paid by individuals and the services they receive in return. When there is a balanced budget, the debt service introduces a gap between taxes paid and public services received by taxpayers. This gap feeds into the population the impression that taxpayers «do not get their money»^13(*) .Therefore, the profitability of the tax base may be affected, as well as the support for government programs.

* ¹² Bourbogne report 2005 RB-6 September 2005 published by CIRANO,P.20

* ¹³ The same