As citizens, we need to have some ABC’s of what Public Debt is, instead of leaving this to accountants and financial gurus alone. All professionals, including real estate professionals, should take some active interest in Public Finance in general, and Public Debt in particular
Campaigns for the forthcoming October 29 General Election are now in full gear. One subject that keeps on cropping up is “Public Debt”, or “National Debts”. Accusations and counter-accusations are being traded; that the country is highly indebted and the economy may soon collapse.
To counter this it is pointed out generally that public debt is “sustainable” and that the borrowed money is used to finance the necessary infrastructure for national development.
As citizens, we need to have some ABC’s of what Public Debt is, instead of leaving this to accountants and financial gurus alone. All professionals, including real estate professionals, should take some active interest in Public Finance in general, and Public Debt in particular.
We start by realising that all governments in the world need finance, in order to be able to execute their duties which include ensuring law and order, defending the nation, providing essential goods and services, managing the economy, constructing and maintaining infrastructure, addressing equity matters, paying civil servants, and so many other duties.
Every year, the government, through the Minister for Finance, prepares a national budget showing the earmarked expenditure for that financial year, and proposing sources of revenue, the main one usually being taxation, which will meet that expenditure.
The budget may be balanced meaning the expected revenue is adequate to finance the expected expenditure. In rare cases, the budget may have a surplus of revenue over the expected expenditure.
Unless the country is well endowed with resources, the government, in the case of a surplus budget, may be accused of underspending or over-taxing.
The most common scenario these days is a deficit budget: the expected revenue is inadequate to meet the earmarked expenditure, even when foreign aid is taken into consideration. In such a case, the government resorts to borrowing, from domestic or external sources, to finance the revenue gap.
The outstanding debt (deficit), over the years turns into a public or national debt, also known as sovereign debt. Public debt also includes other claims on government like outstanding pensions, or claims of compensation over nationalised private assets and arbitration claims over disputed contracts.
Public finance experts point out that Public Debt has been growing in the past many decades in all countries. Indeed, managing the public debt is a key element in managing public finance.
In Adam Smith’s time, economists were against government borrowing except in emergency cases such as financing war; and even in such an event, the borrowed money had to be repaid in as short a period as possible.
With time, the duties of governments have increased: from national defence and ensuring law and order, to a whole array of activities including social and economic engineering, investment in strategic infrastructure and research, subsidies and ensuring social welfare and so on.
So, borrowing is now, part and parcel of government finance. There is bad and good debt. Bad (or, unproductive) debt is where governments borrow to finance recurrent expenditure like paying salaries.
Good (or productive) debt is the case where the money borrowed is used to create national assets such as essential infrastructure (highways, bridges, railways, water works, electricity supply, dams and irrigation, education and health infrastructure, and so on).
Domestic debt is money borrowed from within the boundaries of a nation; external debt is money borrowed from foreign governments and financial institutions. The latter drains a country’s foreign currency reserves when undertaking repayment.
Public borrowing has the advantage of enabling the government to undertake investments now instead of waiting to do so in the future. This can enhance current social and economic development. When used correctly, public debt can improve the standard of living in a country.
However, high debt may lead to lowering of value of national currency and driving up interest rates. Repayment of external debt often means transfer of money in forex from debtor to lender countries.
As more and more government money goes to debt repayment, less is left for services. This may lead to the “sovereign debt crisis”.
To avoid this burden, governments need to carefully find that sweet spot of public debt. It must be large enough to drive economic growth, but small enough to keep interest rates low.
The debate on public debt should not just be about its size, but also on the use of the borrowed money and the eventual impact on the economy.
The sources and types of loans should attract debate, especially where governments move from cheap multilateral loans to expensive commercial and bilateral loans.
The question of debt sustainability is also an area of major contention. The debt-to-GDP ratio is and indicator of this sustainability. We will discuss this in our next article, focusing on the Tanzanian experience.
Lusugga Kironde is Professor of Land and Urban Economics and lead consultant at TKA Company Ltd. [email protected]
