Question

The government of Happyland collects $100 million in taxes each year and currently has a public debt of $1.2 billion, which it finances by issuing Treasury bonds that pay 8% per year. Is this a manageable level of debt for the government of Happyland?

No, the debt is not manageable because the government must repay the entire $1.2 billion debt at the end of the year.

No, the debt is not manageable because interest payments equal $96 million per year.

Yes, the debt is manageable because the public debt is only 12 times the size of tax revenues.

Yes, the debt is manageable because an interest rate of 8% is relatively low.

Answer 1

No, the debt is not manageable because interest payments equals $96 million per year.

Annual interest payments on the debt are:
0.08 x $1,200,000,000 = $96,000,000

While it is possible to cover interest on the debt with $100 million in tax revenues, that would leave just 4% ($4,000,000/$100,000,000 x 100) of tax revenues to pay the principal on maturing loans and all other government expenditures (assuming no additional debt is incurred). This is not a manageable level of debt.