National or public debt

NATIONAL OR PUBLIC DEBT AND WHY GOVERNMENT BORROW MONEY.

Meaning: National or public debt refers to the debt a country owes to its citizens or other countries or organizations such as the International Monetary Fund (IMF) and the World Bank.

The debt which a country owes its citizens is known as internal debt while the debt owed by foreign governments and organizations is known as external debt.

National or public debt and sources of government borrowing

The government of Nigeria can use the following instruments to borrow money. These include:

 Treasury certificate: These are securities for medium-term borrowing. They are for a period of one to two years and they carry a higher rate of interest than treasury bills.

Treasury bills: These are securities used for short-term borrowing for about 90 days. This carries a low rate of interest.

 National savings scheme: Government can also borrow money from the national savings scheme to finance its projects.

Development stock: These are referred to as government stock and they are used for long-term borrowing of up to five years and above.

NATIONAL OR PUBLIC DEBT AND WHY GOVERNMENT BORROW MONEY

            PERFORMANCE OBJECTIVES on National or public debt and Why government borrow

Explain the concepts of budget surplus balanced budget and the component of national debt.

Explain the concept of and criteria for revenue allocation (including resource control) in Nigeria and associated problems

Negotiations: The government can borrow from external financial institutions such as the Paris Club, International Monetary Fund (IMF), and World Bank

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REASONS WHY GOVERNMENT BORROW MONEY

  1. To finance a budget deficit: When a government experiences deficit budgeting, it may borrow money in order to finance such a budget.
  2. To finance huge capital projects: Money can be borrowed by the government to enable it to finance some huge capital projects.

To meet the cost of national emergencies, the government can embark on borrowing to enable it to meet the cost of national emergencies, such as war, drought, famine, hurricanes, etc.

NATIONAL OR PUBLIC DEBT AND WHY GOVERNMENT BORROW MONEY

To reduce the economic burden on taxpayers: Government can decide to reduce the economic burden on taxpayers by borrowing money to execute proposed projects.

To meet the balance of payment disequilibrium: Government can borrow money to enable it to correct or execute the balance of payment deficit.

  • To create jobs: The government can borrow money to start projects that will help people find work.
  • To service some loans: Government can borrow money in order to service another loan earlier taken, either from internal or external sources.
  • If a government expects less money, it may need to borrow in order to get the necessary funds for its projects. This helps to control changes in the country\’s income.

Some terms associated with budget

Debt servicing

Debt servicing refers to the payment of interest on loans taken by the government and the payment of the capital sum at a future date.

Debt management means that the government organizes the country\’s debts, which are in foreign currency, with the goal of decreasing the total amount of external debt.

The burden of national or public debt

The extent of the burden of national or public debt is determined by the type of debt, whether internal or external, the purpose of the debt and the period of repayment.

How national debt can affect the economy of a country in the following ways:       
  1.  The servicing of an external debt will involve an outflow of resources, which can otherwise be used for economic development.
  2. Reducing the availability of foreign exchange in the form of depleted foreign reserves can occur.
  3. The servicing of a large internal debt will limit the government’s ability to provide social capital and services for the people.
 how a domestic debt will influence the distribution of income in the country.
  • If a large internal debt is sustained by a high rate of interest, it will reduce private investment on capital goods.
  • A large external debt can make a country to be susceptible to the whims and caprices of external creditors.

The national debt can have an impact on income distribution in several ways:

Higher Taxes: To repay the debt, the government may resort to increasing taxes. This can burden individuals with higher incomes more, leading to a decrease in their disposable income and potentially widening income inequality.

Reduced Public Spending: The government may choose to cut spending in order to reduce the national debt. This can affect social programs and public services, which are often relied upon by lower-income individuals and families.

As a result, income inequality may worsen due to reduced access to essential services and support.

Interest Rates: If a large portion of government revenue is allocated to servicing the debt, it can lead to higher interest rates for individuals and businesses borrowing money.

This can disproportionately affect lower-income individuals who may have limited access to credit or loans, further exacerbating income disparities.

Crowding out Investment: High levels of national debt can crowd out private investment by competing for available funds in the financial market.

This can restrict economic growth and job creation, which can disproportionately affect lower-income individuals who may have limited employment opportunities.

Uncertainty and Inflation: Excessive national debt can create uncertainty in the economy, potentially leading to higher inflation rates.

Inflation erodes the purchasing power of lower-income individuals, making it more challenging for them to afford basic necessities and widening income gaps.

It\’s important to note that the relationship between national debt and income distribution is complex and can vary depending on the specific circumstances of each country.

Additionally, various economic factors and policies can also influence the relationship between national debt and income distribution.

NATIONAL OR PUBLIC DEBT AND WHY GOVERNMENT BORROW MONEY

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