Categories: ECONOMICS 6

Explain the methods of repayment of public debt.

Written by

Haseena Banu

2 years ago

Introduction:

Due to increase in the activities of the Government the volume of public expenditure has rising over the years and every time it is not possible to meet a increase expenditure through the traditional source of revenue that is taxes beside increase in taxes are unpopular with the general public thus the Government obtains additional revenue through borrowing. In present times borrowing by the government has become a routine method of financing along with other resources of rising revenue. Public debt or government debt is the debt which the government owes to individual, business enterprise or banks it can borrow from within or outside the country. The methods of repayment of public debt are

Methods of repayment of public debt:

The various methods of debt repayment are.

Budgetary surplus: Sometimes the government is able to generate surplus in its budget and it can utilize this surplus to repay its debt but this is a rare phenomenon. As modern Government follow a deficit budget policy more over if a surplus is generated it is insignificant and cannot be used to reduce the burden of public debt.
Purchase of Government bonds: The government may purchase its own bonds and security from the market. this results in automatic liquidation of the debt liability of the government
Refunding: It is the process by which the government raises new bonds to pay off the maturity bond. Simply stated, it means that the government takes a fresh loan to repay an older one. In this way the monitory burden of the debt is not liquidated but it is postpone to some future date.
Debt conversion: This method is used to reduce the burden of the interest debt into low interest debt. The government may have borrowed during the time when the rate of interest was high but if the general rate of interest in the market falls then the government may convert old High interest loan into a new low interest loan. This reduces the burden of the government but is possible only when the government enjoys good credit worthiness.
Sinking fund: Sometimes the government creates separate fund known as sinking fund for the purpose of repaying it debt. The government credits certain amount of its revenue every year for the repayment of the outstanding debt. The sum which is set aside is so calculated that over a certain period. The total sum accumulated along with its interest is enough to pay off the loan. Sinking fund method is the most important and systematic method of debt redemption.
Terminal annuities: Under this method the government pays its debt in equal annual installment which include interest and principle amount. These annual payments are called annuities. this method reduces the burden of debt every year and with the time of maturity of the debt it is already fully paid off
Export surplus: Generally the method discuss above are used to repay internal debt, but external debt need to be repaid in foreign exchange and this is possible by creating an export surplus. If the foreign loans are invested in those industries which produce exportable goods, then the loans can be easily repaid. However, if the loans are using for unproductive purposes then the export surplus can be generated by reducing the availability of goods for domestic consumption. in this case that burden may felt by the public.

also read: explain the purpose and burden of public debt.

Haseena Banu

Haseena Bano is the Editor at Ecolaw.in, a dedicated platform providing comprehensive resources for BA LLB Economics courses. She also serves as a Professor of Economics at Al-Ameen College of Law, where she brings her academic expertise and passion for teaching to shape the next generation of legal professionals. With a deep understanding of both economics and law, she plays a pivotal role in bridging theoretical concepts with real-world applications.