Theory question 108
Public Finance(a) What is public debt?
(b) Outline any three reasons why countries borrow.
(c) Highlight any three effects of a huge national debt on the economy of a country.
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(a) Public debt is the total amount of money owed by a government to lenders within the country (internal debt) and outside (external debt).
(b) Any three: to finance a budget deficit; to finance development projects/infrastructure; to correct balance of payments deficit; to meet emergencies (war, disasters); to control inflation (borrowing from the public); to bridge foreign exchange gaps; to repay old debts.
(c) Any three: heavy debt-servicing burden reduces money for development; higher taxes; capital flight and lower investment; loss of sovereignty to creditors' conditions; inflation if financed by money creation; worsens balance of payments; burden passed to future generations.
Debt helps development if used well, but servicing can crowd out other spending.