Exploring the Effects of High National Debt on Household Consumption and Foreign Direct Investments

Abstract

As nations grapple with the challenges posed by increasing debt burdens, finding out the intricacies between macroeconomic indicators would give insights into how household consumption and foreign investments are affected by the high national debt level, and how they move along with the identified variables such as tax revenues and economic health of the country. The goal of this paper is to focus on the implications of high external debt for macroeconomic variables and find out the variables’ effects in the short term and the long term by using a quantitative approach or method. The researchers intend to find out if the household consumption expenditure is influenced by high national debt, tax revenues, total economic health, and foreign investments, or otherwise, finding out as well if the foreign investments are influenced by high national debt, tax revenues, total economic health, and household consumption expenditure or not. The paper also has its constraints given that related literature is limited in terms of the immediate relationship of the variables that the researchers want to study.

With the knowledge that high national debt would have a toll on the country’s economic performance or the gross domestic product (GDP),  there is the perception of high debt having an impact on household consumption or consumer spending that can alter the living conditions or reduce incomes of the people, given that the government would need to look for ways in order to pay off high debt by resorting to collecting more taxes. An impending increase in tax rates would eat up a portion of personal income that can in turn affect their ability to consume. High tax rates can also discourage foreign direct investments (FDIs) into the country, as this factor can also contribute to decisions to investments since other countries might offer a more competitive tax package. Aside from this, with the perception that a country can be on the brink of debt overheating due to high national debt, foreign investors would hesitate to come in due to the idea that the economy is struggling, a bad precedent for doing business. High amounts of public debt can restrict the government's options for fiscal policy during recessions, which lessens the government's ability to help the economy recover and push forward. As debts increase, the growing perception that this would be contra beneficial to the living conditions of people despite the everyday grind could affect consumption behavior and future expectations on price and policy directions, further affecting the country’s overall economic health.

While fiscal policies are strong indicators of government revenue raising and spending directions and actions,  tax collection or revenues are necessarily integral as a key variable influencing a country’s capacity to pay that can also limit potentials of incurring a high national debt level. With good tax collection practices and tax policies, as a key source of revenues to help pay off the country’s debt, other factors such as monetary policy are also important.  Monetary policy control is needed because rising interest rates can make it more expensive to borrow to cover basic household needs and other forms of financial needs, such as mortgages and other financial obligations.  This could limit disposable income and reduce consumer spending. Moreover, related hazards that impact general consumption behavior include the depreciation of the currency and price rises that lead to inflation, which could exacerbate the living conditions of the people. These might lower families' purchasing power. Therefore, the effects of large public debt on investments and budgets emphasize the necessity of sound fiscal management and policy use to reduce any potential negative effects.

The research examines the dynamics of macroeconomic aggregates in the context of the nation's high levels of national debt, tax revenue, household spending, and foreign investments. Among the objectives are trend analyses of significant variables such as GDP, tax revenues, foreign direct investment (FDI), household consumption, and national government debt. Another study objective is to comprehend the relationship between tax income, state debt, household expenditure, and foreign direct investments. Its goal is to determine whether the country's growing debt affects household consumption and investments. The study utilizes the Autoregressive Distributed Lag (ARDL) cointegration technique to examine the links between GDP, tax collections, foreign investments, household consumption, and national debt. In conclusion, the analysis' result regarding the influence of total national debt, overall economic health, and foreign investment on the household's final consumption expenditure (HCFE) is largely evident in both the short run and long run. The ARDL is a flexible model that allows analysis at level and first differences. Different lag lengths may also be used in the model having different variables.