Public Borrowing Lecture Notes

Introduction

Process by which a government obtains funds to cover budget deficits or finance public projects.
Occurs when government funds are insufficient to meet the needs of the populace or finance infrastructure development.

Total amount of money that the government owes to creditors, both internally and externally.
Represents accumulated past borrowings not yet repaid.
Includes financial obligations such as bonds and loans used for public spending.

Internal Debt: Loans from domestic banks or individuals.
External Debt: Loans from foreign creditors, including international institutions.
Productive Debt: Debt incurred to finance projects that generate economic growth (e.g., infrastructure).
Unproductive Debt: Debt incurred for expenses that do not generate direct economic returns (e.g., salaries, pensions).
Compulsory Debt: Raised through mandatory contributions, usually during emergencies.
Voluntary Debt: Subscribed willingly by individuals/institutions (e.g., government bonds).
Redeemable Debt: Debt with a fixed repayment date (e.g., bonds).
Irredeemable Debt: Perpetual debt with no maturity date.
Short-term Debt: Must be repaid within a year.
Long-term Debt: Debt lasting over a year, used for projects with longer funding needs.

Cover Budget Deficits: When expenditures exceed revenues.
Finance Infrastructure Projects: Large capital projects often need external funding.
Economic Stimulus: Borrowing to finance stimulus measures in economic downturns.
Manage Cash Flow: Short-term borrowing to address timing differences in revenue and expenditure.
Refinance Existing Debt: Issuing new debt to pay off old debt at lower interest rates.
Respond to Emergencies: Quick mobilization of funds during crises (e.g., pandemics, natural disasters).
Invest in Social Programs: Funding for essential services like education and health care.
Stabilize the Financial System: Provide liquidity to banks or support financial markets.
Support Monetary Policy: Manage inflation and interest rates through borrowing.

Stimulates Economic Growth: Investment in infrastructure and education enhances productivity.
Crowding Out: High borrowing can lead to increased interest rates, reducing private investment.
Inflationary Pressure: Increased demand can lead to inflation if supply does not keep pace.
Debt Sustainability: Excessive borrowing without returns can lead to unsustainability issues.
Exchange Rate Effects: Foreign borrowing can affect domestic currency value.
Long-term Growth Impact: The effectiveness of borrowed funds determines future growth.

Debt to GDP Ratio: Compares total debt to economic output.
Debt Servicing Ratio: Portion of revenue spent on debt repayment.
Gross vs. Net Debt: Gross debt is total debt; net debt subtracts financial assets.

Reduced Government Spending: Limited funds for essential services.
Slow Business Growth: Higher interest rates hinder business expansion.
Reduced GDP Growth: Debt servicing reduces investment in productive sectors.

Intergenerational Inequality: Future generations inherit higher tax burdens.
Business Constraints: Challenging environment for business growth due to high debt.
Vulnerability to Economic Shocks: Inability to handle economic downturns effectively.

Public debt can be beneficial if managed well but poses risks to future generations if mismanaged.
Policy makers should prioritize fiscal responsibility to mitigate the long-term impacts of public debt.
Importance of productive investments, economic growth, and proper debt management strategies to ensure sustainability.