Economic Consequences of Government Debt

Policies for Growth and stability

Trends and definitions

A budget shows , for a given year , the planned spending on Govt programs and the expected revenues from tax systems Budget surplus occurs when tax and other revenues exceed expenditures Budget deficit is when expenditure exceeds revenue Balanced budget is where exp = rev Govt debt is when govt borrows

Govt revenue sources

Taxes levied by Central Govt are of 4 types personal income tax, corporate tax, customs duties and excise duties Govt revenue has been rising on account of higher incomes, higher rates of taxes and inflation Direct taxes need to increase coverage or enlarge the tax base and plug loopholes Indirect taxes easier to levy but regressive in nature, if on inputs create cascading effect

Govt expenditure
Revenue expenditure and capital expenditure Exp to GDP ratio 15% close to developed nations and higher than other developing countries Revenue exp major component that has increased is non plan exp, including state deficits Non plan exp is interest payments, subsidies , defence spending Interest payments on growing Govt debt out of financing revenue exp , so difficult to repay

Budget deficits
Revenue deficit Rev receipts rev exp Capital deficit Cap receipts capital exp Rev deficit means Govt borrowing or dissaving to finance current consumption Gross fiscal deficit total receipts total exp excluding Govt borrowings or Borrowings and other liabilites or it is addition to public debt

 Monetised deficit increase in net RBI credit to Central Govt , holdings of T bills , hence the monetised part of fiscal deficit Primary deficit Gross fiscal deficit interest payments

 Receipts Revenue receipts a) tax b) non tax Capital receipts a) recovery of loans b) other receipts c) borrowings and other liabilities Total receipts ( 1+2)

 Expenditure Plan expenditure a) on revenue account b) on capital account Non Plan expenditure a) on revenue account b) on capital account

Economic impact of budget deficits

The crowding out controversy when the govt increases spending, GDP increases by multiplier effect , as output increases and inflation increases , the Govt may reduce money supply, interest rates rise , currency appreciates, pvt investment and foreign investment falls.

Govt debt and economic growth

External vs internal debt internal debt is what the govt owes its own people while external debt is what the govt owes foreigners, hence problem of debt service burden and need to run a trade surplus to pay the interest and lower consumption for the nation

 Internal debt market loans, securities issued to RBI, bonds , T Bills issued to RBI, State Govts and other parites like International financial institutions External debt loans received from foreign Govt and bodies Other L small savings schemes of Post offices , PF , and other interest bearing Govt deposits of railways etc