Most of the same considerations apply to countries as apply to businesses and people, plus a couple of extra cons
Pros of Being Debt Free
- No interest payments
- Not beholden to someone else (financial freedom)
Cons of Being Debt Free
- Buying things on (interest free) credit can save a little money
- Paying for things in installments can match costs to income
- Interest rates can be used to control economic activity and defend currency
- Having a bond market promotes domestic financial activity
- Having government bonds provides savers with a safe investment
There is big difference between having no debt and having no net debt. In the former case, you do not borrow any money and that is rare. In the latter case you have the money but choose to borrow instead. Many individuals do this by spending on credit card even though they have money in the bank, or not paying off all of their mortgage because the interest rate is good (so they can earn more with their money elsewhere).
For governments there are extra benefits from having debt (even if you can pay it off).
Perhaps the best way to understand this though is to look at a few notable examples, past and present.
If you don't set interest rates, someone else will
The Federal Reserve was only established in 1913, prior to that the US had an uneasy relationship with the concept of central banking.
It seems the founding fathers were against central banking, and it wasn't until Alexander Hamilton that "First Bank of the United States" was created in 1791, mandated to last for 20 years, after which it's mandate was not renewed.
Second Bank was established in 1816. Andrew Jackson was strongly against central banking (and banking generally!) and so when he came to power in 1832 he pulled the state money out of the bank. The bank countered by tightening money supply to push the economy into recession. Andrew Jackson held out and paid off the entire national debt by 1836. The Second Bank did not have it's chartered renewed, and liquidated in 1838.
With no debt, and no central bank the US money supply was effectively free. Jackson also introduces the Specie Circular which required all government land be purchased in gold and silver. The rest of the 1830 saw significant inflation and recession, generally attributed to Jackson defeating the central bank.
The US government had lost control of their own economy, and in 1837 the Bank of England raise rates, forcing up domestic US interest rates, precipitating the 1837 panic. The following years were marked by major recession.
For more on this see: WDJ article on US debt and Wiki: Second Bank
Keep some debt for liquidity purposes and financial control
Norway currently has around \$170bn of public debt, with a GDP of about \$500bn. However in 1990 the government established what is now called the "Government Pension Fund of Norway" into which the excess income from Norwegian oil is poured. It is an equity and bond portfolio currently estimated to be worth in excess of \$700bn.
The government of Norway could choose to pay off all its debts easily, but chooses not to. Instead they maintain issuance in sovereign debt markets in order to hold a liquid reserve to cover their daily payments. They also mention using the money to "develop well-functioning and efficient financial markets". A final consideration in their case is that their assets are abroad, and repatriating them would weaken the Krone, so there is some FX consideration here.
Because of this, it is not surprising that Norway has a AAA credit rating, and that also makes it cheaper for Norway to borrow than even the US (based on 5Y CDS).
For more on this see: Norway Ministry of Finance and Norges Bank
Issue debt to give people something to invest in
Singapore has had no foreign debt (ie. non-SGD) since 1995, and consistently runs with a fiscal surplus. Despite this they issue T-Bills and Notes of various maturities consistently and simply invests the proceeds.
Why? According to the Monetary Authority of Singapore (MAS) the main objectives are:
- Provide a liquid investment alternative with little or no risk of default for individual and institutional investors;
- Establish a liquid government bond market, which serves as a benchmark for the corporate debt securities market; and
- Encourage the development of skills relating to fixed income financial services available in Singapore.
For more on this see: MAS MoneySense
If you don't pay, its not really debt...
This is only a semi serious one, but one country that basically has no debt is North Korea, for the simple reason that no-one will lend to them. They do technically have debts though, including a debt to Sweden for some Volvos, but in 1984 they defaulted on them all and refused to pay anything. It seems they have no-intention of ever paying. I don't think I need to explain the downsides to the North Korean approach to economics.
See: North Korea's Stolen Volvos