governments are prevented from borrowing unlimited funds through the enforcement of debt limits. explain the concept of a debt limit. How is the concept of borrowing power or debt margin connected to debt limits?

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Pandora

5 July, 05:23

governments are prevented from borrowing unlimited funds through the enforcement of debt limits. explain the concept of a debt limit. How is the concept of borrowing power or debt margin connected to debt limits?

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Farley · Answer 1

The concept of debt limit explains the restrictive power of legislative to impose a limit on the amount of debt an executive can borrow for the state. Debt limit is the authorized maximum amount of debt that government can borrow as legally specified by the legislative. The debt limit is usually expressed as a percentage of nation's GDP.

The major reason why debt limit is put in place to make sure that government does not place uneconomical future debt burden on the citizens.

For relationship between debt limit and debt margin, the borrowing power of government is measured through the comparison of debt limit with debt margin. Debt margin shows the difference between the debt limit and amount that the government has actual debt.

For example, a government has a debt limit of 25% of its GDP and actual debt of 18% of its GDP. The difference between the two percentages of debt shows the debt margin.

So debt margin serves as a gauging tool for borrowing within the debt limit.