Economic Aspects of the Public Debt To some, the incurring of debt is a symptom of bankruptcy(although theoretically speaking, the government

cannot be bankrupt in a manner the private firm would), of irresponsible fiscal management, to others, it is somehow or other correlated with elections or electioneering, and with graft and corruption. PUBLIC DEBT VS. PRIVATE DEBT Similarities: 1.They withdraw resources from alternative uses *Government borrows when it suffers from revenue shortfalls *When it desires to stabilize the economy by holding on to the resources Differences 1. Manner of securing resources for debt services

PUBLIC DEBT The gov't utilizes its vast compulsory power to tax The gov't cannot bank on similar returns on private firms

PRIVATE DEBT Private borrowers rely on returns from his investment Motivated by profit May diminish the standard of living of the debtor Ex. Properties used as collateral for loans

2. Corollary consideration

Bankruptcy cannot be similarly to government -it is tantamount to implying that everybody will be bankrupt as to render zero taxable capacity

Repayment of debt can cause bankruptcy on the private debtor

3. Burden of future generation

Macroeconomic Concept Microeconomics Concept Owned to ourselves, Owned by one the economy, or the individual or group country being to another, parties viewed as organic which are distinct, unit separate units

4. Interest Payment

Assumes the complexion of a transfer for transaction where

Tends to reduce the command of the debtor over goods and services

assets and liabilities cancel out WHY GOVERNMENT BORROW 1. To augment inadequate resources for normal housekeeping and to provide essential services such as education, health and sanitation, police protection, administration of justice and the like. 2. To finance participation in wars 3. As a measure to stabilize the economy- public debt operations are used as a compensatory fiscal tool. THE BURDEN OF DEBT Burden- referred to real burden causing the the loss or administration of resources in private hands due to the incurrence of the debt. As a result, less goods would be available than would have been if the debt were not incurred. The Burden of debt can be viewed as: 1. direct or primary burden referring to the withdrawal of resources from private use. 2. secondary or frictional burden referring to difficulties arising from transfer problems . raising of tax revenues with which to pay the interest on the bonds or securities. 3.net burden this implies the possibility of negative burden or net benefit if the benefits outweigh the possible difficulties created by borrowing. Reproductive debt- debt which is backed up by possession or creation of assets of equal value Deadweight debt- one where there is no existing corresponding assets Is the Public Debt as Debt A Burden on Future Generations? 1. Internally-held debt

is not burdensome in the sense that it is tantamount to resources from one pocket to the other.

As a whole, taxpayers shoulder the tax burden when the government repays debts and taxes imposed to raised the interest payments cancel out for the entire economy The interest payment The public debt create a heritage of both claims and obligation

2. Externally-held debt involves the flow resources to foreigners or foreign governments in the sense that the debt service requirements will have to financed ultimately from exports receipts. Interest payments are in the form of foreign exchange which is largely acquired from exports. can be burdensome to future generations where repayments will diminish the wealth or the command over resources of the future generations.

DEBT CEILING The establishment of borrowing ceilings by statute stems from the belief that a country cannot borrow an amount beyond its capacity to repay. At best these ceilings are mere approximations of the country's debt capacity 2 kinds of limits on debt: Statutory limits are arbitrary restrictions on the borrowing authorities rather than quantitative estimates of borrowing capacity. Their only visible usefulness is the prevention of irresponsible borrowing Normal limit is dictated by the needs of the economy itself. varies in relation to the needs for fulfilling certain defined goals stabilization,distribution, allocation. It is a matter of functional finance

DEBT RETIREMENT has been intended either to stave off possible embarrassment or to comply with legal requirements. Refinancing the main tool of debt service as indicated by the Philippine experience from fiscal year 1956 to fiscal year 1966. it can be very effective to suit the requirements of investors in open market operations. Refinancing program has been accomplished thru the cooperation of the Central Bank, PNB, DBP, Veterans Bank, SSS and GSIS. THE ECONOMIC EFFECTS OF BORROWING Borrowing from individuals effects on consumption depend upon the features of bonds sold to individuals if the instrument is highly liquid, the contractionary effects on consumption will be minimal if not nil.

On the other hand, if the instrument are illiquid before maturity individuals tend to hold them. Due to high interest rates, individual saver not only persuaded to sacrifice liquidity but also encouraged to save more income resulting to less consumption. Borrowing from banks can have either contractionary or expansionary effects depending upon whether or not banks substitute loans to gov't for loans to the private sector the reserve eligibility or redeemability of the debt instruments and the reserve position of commercial banks Borrowing from non- bank sources may curtail money expenditures for goods and services, provided that the terms of the borrowings induce economic units to substitute gov't securities for purchases of G/S rather than for money holdings alone. Such inducements can provided through relatively high interest rates.