PUBLIC BORROWING
Fiscal Resource Management
Reporter: RONNIE F. TAMBAL
PUBLIC DEBT
government debt, represents the total outstanding
debt (bonds and other securities) of a country’s
central government
EXTERNAL VS. INTERNAL
outside the country
domestic lenders
A RATIO OF GROSS DOMESTIC PRODUCT (GDP)
an indicator of the ability of a government to meet
its future obligations
THEORIES OF PUBLIC BORROWING
CLASSICAL
 “Laissez Faire” policy
 minimum function
 perfect competition
 equilibrium point
NEO-CLASSICAL
 welfare theory, economic system functions
in response to the instructions of the market
ultimately the consumer
 states role: supplementary and regulatory
 in case of imperfect allocation such as
monopoly
KEYNESIAN
 deficit financing and authorized
government to borrow for all purposes so
that effective demand in the economy is
increased resulting in increased
employment and output
 borrowing for consumption was as
desirable as borrowing for investment in
productive goods because consumption
expenditure induced investment to rise
BURDEN OF PUBLIC DEBT
 The distribution of tax burden and public
securities among the people. In a sense, it
is the hardship sacrifice and loss of
economic welfare shouldered by the
taxpayers on account of increased
taxation imposed for repayment of public
debt.
CLASSICAL THEORY ON THE BURDEN OF PUBLIC
DEBT:
 it is a burden
 taxes reduces consumption while internal
borrowing leads to a reduction in private
capital formation
CRITICISMS ON CLASSICAL VIEW
 government expenditure is not always
unproductive
 real burden must be borne in the period in
which public expenditure has been
incurred
ISSUES & PROBLEMS OF PUBLIC BORROWING
1. Higher debt interest payments
2. Higher interest rates
 markets are nervous about
governments ability to repay and they
demand higher bond yields in return
for perceived risk
3. Crowding out of the private sector
 private sector lends money to the
government, they have less money to
spend and invest
 although government spending
increases, private sector spending falls
and there is no overall boost to the
economy
 crowding out is unlikely to apply in a
recession because in a recession
private sector saving is rising and
there are surplus savings. If the
government borrow, they are making
use of surplus savings and so do not
‘crowd out’ the private sector. The
government are spending to offset the
rise in private sector saving.
4. Higher taxes in the future/spending cuts
5. Vulnerable to capital flight
6. Inflationary pressures
 governments may be tempted to deal
with high levels of debt by printing
more money
Public debt must be large enough to drive
economic growth but small enough to keep
interest rates low.