Macro Economics

What is mean by public debt? Why a country goes for public debt?  What are the objectives of public debt?

The loan/advances taken by the government from inside and outside the nation is known as Public Debt. Government used to receive the loan from individual, firm, banks and financial institutions. The advances/loan taken within territory of nation is called Internal loan/debt. In the same way, the loan taken from outside the boarder of country is known as external loan/debt. Sometimes it is also called foreign loan. These kind of loan in many circumstances refundable in the end of maturity with principal amount and its interest.

(Source of image is internet)

The system of bearing/collecting loans by government started from 18th century. But, it is considered to be accepted/implemented after first world war. The economics scholar have deviate view on usage or necessity of public debt by a nation. Renowned traditional economist Adam smith is very pessimistic about the progress result out of the usage of public debt in one economy. Incremental of government expenditure, degrading economic atmosphere and extra financial loss will be encountered on the employment of public debt, he believes. As nowadays, public debt is considered as a main economic tool, modern economist are very optimistic about the usage of public debt in one economy. They say public debt is the means of productivity.

Now, lets see why public debt is purchased or rendered by a government of a country:

As we know that every year government comes with the budget program in the parliament for a fiscal year which is of one year. In Nepal it is announced in Jestha 15 of every year which is fixed deadline of announcement by the constitution of Nepal, 2072. In the current fiscal year 2019/20, Rs. 4.93 Kharba (in Nepalese currency) is expected to be finance from public debt. Out of this, Rs. 2.98 Kharba is called from foreign debt and remaining Rs. 1.95 Kharba is called from internal debt. So, why this big amount in total Rs. 15.32 Kharba budget? Reason, when the amount from government revenue is short to meet the national expense for daily operation and development (infrastructure) budget the government takes debt, called public debt. Government create debt by issuing securities, government bonds and bills. There is credit rating system for every country by an international agency which rates the credit worthiness of particular country. Less credit rating having country sometimes borrow fund directly from super-national organization (IMF, ADB, WB, etc). So, from the above justification, we can say that public debt is the important part of government financial policy.

The objectives of the public debt is as follows:

i.  To bridge the gap of government budget deficit,

ii. To manage the inflation rate,

iii. To control the rising price level,

iv. To manage financial resource for sectoral development of nation,

v. To create job opportunities in nation,

vi. To increase a production and productivity,

vii. To increase and sustain the economic activities,

viii. To defend the situation of climacteric's,

ix. To develop on priority sector, etc.

Happy reading!