Public Debt

Public Debt

Public debt meaning: It is the total amount of money that is owed to the public by the government to meet the development funds. In public finance, it is also known as public interest, government debt, national debt and sovereign debt. The public debt can also be owed to lenders within the country. Even foreign leaders can owe money to the public, but this type of debt is called external debt. By handing out government bonds and bills, the government can create public debt. 

The debt that is the addition of all prior deficits is also termed public debt. If one person wants to analyse the public debt, the common method to do so is to check the duration until the repayment is due. Debt can be either short-term, medium-term or long-term. A debt of one year or less is generally considered short-term debt. In contrast, the ones that go for around ten years or longer come under long-term debt. The one that is between these two ranges is the medium-term debt. 

Types of Public Debt

There are four types of public debt, and they are as follows:

Internal and External Debt

The government’s borrowing within the country is known as internal debt. The government can borrow this debt from sources like banks, individuals, business firms and other internal sources. 

On the other hand, the government’s borrowing from abroad or international is known as external debt. These types of debts contribute to the development programmes. A few of the sources are bilateral borrowings, multilateral borrowings, loans from the Asian Development Bank, World Bank etc.

Productive And Unproductive Debt

If the loan is financed for projects that will bring revenue to the government is known as productive debt. They are self-liquidating in nature—for example, irrigation, power projects, infrastructure, etc. 

When the loans are a net burden on the community, they are known as unproductive debts. In this case, the government charged additional taxation for service and repayment.

Compulsory And Voluntary Debt

Loans that are raised due to the government’s borrowing from the public by using coercive methods are known as compulsory debt—for example, the taxes paid by the public.

The members of the public and institutions like commercial banks can subscribe to the securities issued by the government loans, which is known as voluntary debt. For example, the public borrowings.

Redeemable And Irredeemable Debt

The debt that the government repays after a fixed period is known as redeemable debt. To sell securities to the public, the government borrows money from them. The interest on this debt is paid irregularly. 

The debt that has no promised date of repayment by the government is known as irredeemable debt. Therefore, the interest paid may be regular. But such borrowings are not reported by the government.

Public Debt Management 

It is the process of establishing and executing a method for regulating the government’s debt. This process also includes meeting any other sovereign debt management goals the government has set. A few of these goals are to maintain and develop an efficient market for government securities. The government should strive to make sure that the rate of growth in their public debt is fundamentally sustainable. This is the public policy that is derived from the broader macroeconomics context. It can, later on, be serviced under a wide range of situations while meeting expense and risk objectives. 

To strengthen the quality of their public debt management, some guidelines are designed to assist policymakers. These policymakers will consider their reforms to reduce the country’s vulnerability to international financial shocks. Domestic and external public debt and including a broad range of financial claims on the government are covered by these guidelines. Principles applicable to a broad range of countries at different stages of development are mainly focused on these guidelines. The sole purpose of this management system is to encompass the main financial crisis over which the central government exercises control. 

Implicit Debt

The government of future payments from the state is the promise of implicit debt. Long-term promises and social payments are usually included in this, for example, pensions and health expenditures. Other expenditures like education or defence are not included as they are largely paid on an exchange basis to government employees and contractors. It is hard to cost them precisely, and this is the main problem with this implicit debt. This is due to the factors that are dependent on the amounts of future payments. 

There are no money funds in the government account of the United States and many other countries for future social insurance payments. A system that involves saving and investing might have been included as an alternative social insurance strategy.