Debt and Deficit Financing 17 In defining assets which contribute to realization of human rights, we would argue that investments in human capital must be included, as well as in physical capital. There is no point in building a school if teachers are not also provided. These kinds of investments can also raise the productivity of private investments. Enhanced productivity supports faster growth and higher incomes which, in turn, increase tax revenues and allow governments to pay back the initial borrowing over time. Public investments in education, health and infrastructure also attract more private investment and are often more decisive in investment decisions than simply providing tax breaks to businesses. These investments support long-run growth and generate the resources needed to meet future debt obligations, as well as supporting the realization of human rights. Two key questions then arise when considering whether borrowing might positively or negatively affect human rights. First, to what extent are assets built through borrowing contributing to human rights? If the assets are not improving human rights processes or outcomes, obviously the need for such borrowing should be questioned. Second, will those assets generate income through economic activities which directly or indirectly re-pay the debt, or at least the interest payments? Investments in nutrition and education, for example, make some people more productive, which will increase output. Provided there is a way of taxing this output, the debt can be serviced by higher tax revenue. A further consideration is the overall state of the economy. Borrowing in a recession and borrowing in good times are very different. During a downturn, government spending represents an important policy instrument to stimulate economic activity and get the economy going again. Deficit financing plays a central role in allowing governments to increase expenditures in recessions, because government revenues fall during recessions. Without the ability to borrow, governments may have to cut spending in response to declining revenues, making the downturn worse. During periods of stable growth, these deficits can be repaid when government revenues recover. The use of deficit financing to support government spending during downturns, and then paying back this borrowing when growth has recovered, is referred to as ‘counter-cyclical fiscal policy.’ Debt servicing payments also depend on macroeconomic variables, such as the prevailing interest rates and exchange rates. In addition, the types of bonds that governments issue and the nature of the bond market have a direct influence on the costs of borrowing. Some governments rely primarily on short-term bonds. In these cases, governments must continually issue new bonds when existing bonds come due, and debt management is more burdensome and uncertain. When new bonds are issued, they may not generate the same resources as the older bonds because of changing conditions in the bond market. In addition, the composition of buyers and sellers in bond markets affects the cost of servicing the debt. For example, in many low-income countries, the domestic banking sector purchases the vast majority of bonds. This gives the banks a great deal of power to influence the price at which governments can sell their bonds.