Public debt has been an important funding source for infrastructure development in the USA and other countries. The debt is often used for the funding of large-scale infrastructure projects or to leverage private investment. Here, let’s find out how the public debt is helping infrastructure development.
Public Debt and Infrastructure Development USA
American infrastructure investment has improved after the IIJA 2021 act, which provided funding for energy, transportation, and climate infrastructure. The ASCE report states that the US infrastructure has improved in recent years due to the federal funding to state and local governments for infrastructure.
In the USA, state and local governments played a key role in infrastructure development and maintenance. When the infrastructure projects do not have enough money, the government uses the public debt to fund the infrastructure projects, as infrastructure is important for driving the nation’s economy.
The public debt is the money that the federal government borrows from other creditors, like development banks, other countries, international organizations, etc., with a promise to repay it with interest. In the US, the government generally takes public debt from municipal bonds, treasury bonds, or loans from global institutions.
How does public debt financing work for infrastructure development?
The public debt financing for infrastructure development is quite simple and effective for funding or attracting investments. The government issues debt instruments to raise capital or make large investments in public infrastructure.
You can understand the mechanism and stakeholders of the public debt financing for the infrastructure development in the points below:
- The state and local governments issue municipal bonds to pay for the US infrastructure development and maintenance. According to reports, more than 75% of the public infrastructure (schools, highways, etc.) is made through state and local government.
- The public-private partnership, the joint effort of the government and private sector, is another effort for debt financing for the infrastructure projects.
- The government takes public debt with a promise to repay it with interest, and they repay the debt through the revenue streams of the project, such as tax revenue, project returns, such as utility fees, user charges, tolls, etc.
Currently, the greatest example is the IIJA 2021 act, where the government relies on public debt to fund the initiatives under the act, as the government issued the bonds to cover the deficit, including the infrastructure spending.
What’s the Benefit of Public Debt in US Infrastructure Development?
The public debt or debt financing instrument supports infrastructure development and offers the following benefits:
- Immediate investment: The public debt provides the immediate investment for infrastructure development, especially for projects that lack funding. This is highly important for the safety and aging infrastructure.
- Economic Growth: The boost in the infrastructure investment improves the connectivity, creates employment, strengthens the nation, and overall contributes to the economic growth.
- Sustainable borrowing: The federal debt grows at a slower rate than the economy, which offers leverage to the government and can be used as a potential investment tool for the essential infrastructure.
- Repayment: The public debt recovery happens through the infrastructure revenue, making it a great asset for the investors and the government. This approach does not burden the taxpayers with more taxes for the development.
- Traceable: The investment through public debt is traceable from capital to revenue for repayment.
What are the concerns related to the public debt investment instrument?
The overuse of public debt is a major concern as it can generate the following problems and affect the nation’s economy:
- Borrowing cost increase: The borrowing cost for loans like houses, cars, or business loans may increase with the overuse of the public debt. The public debt can increase the interest rates, affecting the citizens or businesses.
- Debt increase: With more debt, there is a greater increase in interest rate as well as federal spending, which will increase interest costs and add to more debt. Reports say that by 2044, the interest cost will be more than Social Security.
- Federal deficit: The major concern is the federal deficit. As the interest rate grows, the national debt will increase, widening the deficit. The report claims that the rising debt can reduce the US GDP by $340 billion in 2035.
- Economic Growth: The unsustainable borrowing can lead to inflation, currency devaluation, an increase in reliance on foreign countries or organizations, and imbalances in the macroeconomy.
The overuse of anything is indeed dangerous; though a public debt investment instrument is effective for infrastructure development, with the increasing investment gap, a long-term plan with innovative solutions is needed.
