The impact of state debt on the country financial security

According to the Table 1 we can say that most of scientist have analyzed the state debt as the main determinates of financial security. The next option is GDP and Deficit. Based on this we will try to explain why the state debt has huge impact on financial security.

Formulation of research objectives

The tasks of paper:

- to study the meaning of financial security and its determinates;

- to substantiate the nature and structure of public debt and its role in the financial system to the state;

- to assess the level of debt burden in Ukraine as a factor of its financial security and creation of economic-mathematical model of the relationship between economic growth and the public debt;

- to make a conclusion based on all steps mentioned earlier.

For achieving the main goal of paper there were used such methods: analyses of literatures for examining the previous works of scientist and create theoretic model; economic analysis of the structure and dynamics of public debt; empiric analyses for the construction of an economic- mathematical model and analysis the relationship between quantities; comparative analysis for learning difference in financial situation and state debt based on dates; generalization method for studying the impact of public debt on the financial security of Ukraine.

Presentation of the main results and their justification

Virtually there is not one aspect of the country's national security that does not directly depend on the level of its financial security. At the same time, the level of financial security itself largely depends on the level of other aspects of national security. Consideration of interrelations and interdependencies between different aspects of national security allows finding measures to prevent or overcome threats to the national interests of the country [6].

Financial security is traditionally regarded as the most important qualitative characteristic of the economic system, which determines its ability to maintain normal living conditions of the population, sustainable provision of resources for the development of the national economy, and the consistent realization of national and state interests. As the world experience shows, ensuring economic security is a guarantee of the independence of the country, a condition for stability and effective life of the society, achievement of success. This is explained by the fact that the economy is one of the vital aspects of the activities of society, the state and the individual, and therefore the notion of national security will be an empty word without assessing the viability of the economy, its durability with possible external and internal threats. Therefore, ensuring the economic security is one of the most important national priorities [10].

Before starting the detailed analyze of financial security's determinates it is need to define the meaning of safety. Financial security (or in other words economic security) means a fundamental component of the state's economic security, since any economy is based in finance, and finance is the blood of the economic system of the state. It is one of the most important components of economic system, without which it is almost impossible to solve any of the tasks facing the state.

The main threats to the financial security of the state are:

- Imperfection of budgetary policy and misuse of budgetary funds;

- Effectiveness of the tax system, mass evasion from payment of taxes;

- Significant amounts of state and publicly guaranteed debt, problems with its servicing;

- Sharp changes in the level of prices and the exchange rate of the national currency;

- A significant difference in the ratio of income of the most and the least well-off population, and insufficient social protection of certain population groups;

- Low level of capitalization of the banking system, small volumes of long-term bank lending and a significant level of interest rates on loans;

- Dependence of reforming the country's economy on receiving foreign loans;

- Low level of investment activity;

- Growth of the “shadow” economy, strengthening of its criminalization, illegal outflow of foreign exchange funds, etc.

According to theoretic model from Table 1 the state debt is the powerful indicator that impact on financial security. The fulfillment by the state and its agents of public functions in a market economy determines the appearing of such a subjective economic phenomenon as a public (state) debt. Usually, the amount of financial resources mobilized by the state is not sufficient to meet the financial needs of social development and this gap between resources and needs leads to public debt. That's why the state debt must be considered. Additional financial resource can be mobilized in form of state loan. In this case creditor will be internal subjects (population, subjects of entrepreneurial activity that are located in the country) and external (foreign governing bodies, international organizations of economic development); and the state is a borrower. Emergence of loan facilities leads to the formation of a debt and its maintenance (payment of interest).

Based on the fact that the state has a debt from internal or external creditors, public debt is divided into internal and external. The presence of domestic debt is believed to be more favorable factor for the financial difference of the country than an increase in external borrowings. This is due to the fact that it is easier for public authorities to manage internal debt, to carry out its restructuring. In addition, payments of the state on domestic obligations are contributions to the national economy and do not cause capital outflows abroad. At the same time, foreign borrowing allows state authorities to attract additional financial resources to finance programs that can not be provided from domestic sources.

According to the Law of Ukraine “Pro derzhavnyy vnutrishniy borh Ukrayiny”, the state internal debt is fixed-term promissory notes of the government of Ukraine in cash. State domestic debt is guaranteed by all property in public property [9].

Ukraine's national internal debt includes loans from the Ukrainian government and loans made with an unconditional government guarantee to ensure the financing of nationwide programs. The public debt consists of debts of past years and debts arising from debt obligations of the government of Ukraine.

External public debt is one of the most important instruments of the state's economic and fiscal policy. External government loans mitigate the impact of fiscal and fiscal policy changes on consumer spending, savings and investment, but at the same time, the state attracting foreign compensation capital becomes a debtor of other countries.

State external debt consists of loans for financing the state budget and repayment of external state debt; loans in support of the national currency; loans for financing investment and institutional projects; guarantees to foreign counterparties to fulfill contractual obligations in connection with non-commercial risks; state guarantees provided by the Cabinet of Ministers of Ukraine for financing projects financed by the budget of Ukraine [4].

Usually there are two dangers in the state debt: firstly, the possibility of bankruptcy of the nation, and, secondly, the danger of the debt burden being transferred to future generations.

Concerning the first “danger”, one can note the following: no one can prohibit the government from fulfilling its obligations to service the public debt. These financial obligations are composed of: refinancing (when the maturity of bonds the government sells new bonds and uses the proceeds to pay holders of redeemable bonds); collection of new taxes (in order to obtain sufficient income to pay interest on the debt and its principal amount), issuance of new money.

As for the second “danger”, the specifics of domestic debt are such that the country needs, as it were, to itself. In most cases, domestic debt is only a relationship between citizens of the country. It is also a state loan. The impact of external borrowing on the economy and social security of the country has a number of positive and negative factors, determining the impact of which on the socio-economic situation gives an opportunity to predict the consequences increase in external debt.

The general positive effects of government debt can be:

1. During economic downturns, state borrowing serves purposes stabilizing the economy, since it prevents a sharp fall in aggregate demand. The positive impact of deficit-financed expenditures is compounded by the growth of government expenditures and aggregate expenditures, and hence GDP.

2. Foreign debt allows the country to carry out higher total costs than the national income generated. In the country there is an opportunity to accelerate the growth of the national income of the country due to possible additional external investments.

3. State debt may be involved in order to regulate the tax burden on society. In conducting a policy of economic growth by reducing the level of taxation, the state is forced to attract loans to cover its costs at the initial stage of its implementation.

At the same time, we can observe some negative consequences.

The growth of public debt entails real negative economic consequences:

First, the payment of interest on public debt increases inequality in incomes, since a significant part of state obligations is concentrated among the wealthiest part of the population. Repayment of the state internal debt leads to the fact that money from the pockets of the less well-off strata of the population goes to the better off, that is, those who own bonds become even richer.

Secondly, the increase in tax rates as a means of paying the state domestic debt or reducing it can undermine the effect of economic incentives for production development, reduce interest in investing in new ventures, and increase social tensions in society.

Thirdly, the existence of an external debt involves the transfer of part of the product created within the country abroad (in the event of payment of interest or principal amounts).

Fourth, the growth of external debt reduces the international reputation.

And finally, as result the financial stability of country go down because of huge debts. State collect a lot amount of money. Because exist indirect connection between this two terms. If in country the level of state debt is low, the financial security will increase. And opposite, if the level of state debt is on the higher level, the financial security is go down. For example, foreign borrowing leads to a revaluation of the exchange rate of the national currency and thus causes a deepening the negative trade balance. With the payment of interest and the principal amount of debt connected with the outflow of foreign currency, which leads to a decrease foreign exchange reserves and reduction of imports. Excessive borrowing abroad makes the country vulnerable to fluctuations in the global commodity and stock markets and periodically leads to debt crises. The inappropriate structure of attracting foreign loans is also a cause currency and exchange crises.

As were earlier mentioned the state debt has huge impact on financial security of country. And for better understanding it is necessary to examine the dynamic of public debt. According the Table 2 the highest level of state debt was in 2017 and it was the 2199 billion, in national currency. Unfortunately, the level of state debt each year is increased.

Table 2

The state debt of Ukraine, 2006-2017 years, billions UAH

Source: The World Bank (2006-2017). The state debt of Ukraine, 2006-2017years

Better can be seen on the Fig. 1 the difference between 2006 and 2017 is 2118 bullion UAH. In other words, the debt in 2017 exceeded the debt in 2006 on 27 times. The state debt we can understand better in compare with the state budget. Because in other way it is just numbers that are do not show the reality and current situation.

Fig. 1 The dynamic of Ukrainian state debt, 2006-2017, billions UAH

Source: The World Bank (2006-2017). The state debt of Ukraine, 2006-2017years

According Table 3 we can see that the budget of Ukraine has increased each year. From the 2006 till 2017 it has been grossed on 935 bullions UAH. To be exactly the state budget from 2017 exceed the budget in 2006 approximately 5 times.

Table 3

State budget of Ukraine 2006-2017, billions UAH