What Is a Net Borrower?

A net borrower is an entity that borrows more than it saves or lends out. Because many business entities both borrow and loan funds through various financial instruments and other means, it is the net difference between the amount borrowed and lent that is important and determines whether one is a net borrower or net lender. Being a consistent net borrower over an extended period can present a risk in the form of a large accumulated debt burden. A net borrower could be an individual or company, but it often refers to a government that finances a fiscal deficit or a country that finances a current account deficit.

Key Takeaways

  • A net borrower is any entity that borrows more than it lends out. 
  • While it can apply to any business entity, household, individual, or organization, it is most often discussed with regard to governmental entities. 
  • Being a net borrow over an extended period of time may run up the risk of accumulating an unsustainable debt burden.

Understanding Net Borrowers

A government at any level takes in revenue in the form of various taxes and fees to spend on running its services and financing capital projects. If revenues fall short of expenditures, the government must borrow mainly by means of issuing debt. At the federal level, the government does have money in its treasury and it also holds a portfolio of debt assets for investments, but since its issuance of debt is greater than these combined, it is a net borrower.

Similarly, the U.S., because it runs a chronic and substantial trade deficit, is a net borrower as a country. Year after year the U.S. imports more goods and services than it exports, which forces the country to borrow increasing amounts from abroad to pay for these net imports and maintain the balance of payments. The current account deficits are largely due to the U.S. dollar's status as a global reserve currency and the resulting persistent foreign demand for U.S. dollars and Treasuries, but they have also been attributed to excessive American consumption, fewer competitively-priced goods (which may or may not be connected to exchange rates), fewer competitive goods in terms of quality, and undisciplined government spending on foreign goods. The U.S. sells Treasury securities to foreign nations to finance the trade deficit, which has averaged over 40 billion dollars per year over the last 10 years into 2020.

What's Wrong with Being a Net Borrower?

Debt financing is an inappropriate way to run a household, a business, a government, or a country, unless the debt burden is carefully and responsibly controlled. A household that borrows beyond its means may end up losing its house; a business that is highly leveraged may find it difficult to pursue growth opportunities when the economy is strong or may find itself in a financially distressed state when the economy is weak; a government or a nation that carries a heavy debt burden will expose itself to rising interest expenses on its debt and more costly refinancings when it is time to roll over debt maturities; and, perhaps more importantly, a country that places itself in heavy debt to other countries may severely weaken its strategic position vis-a-vis other world powers. 

For example, for the U.S., being a net borrower to countries with which it may not see eye-to-eye on key geopolitical issues is not an ideal position. The U.S. is a debtor to many nations around the world. These creditors, by holding large amounts of Treasury securities, have a degree of power over interest rates in this country and therefore potential influence on the economy as a whole.