MODULE 5: GROUP 5

• Public borrowing is when the government borrows money from individuals, financial institutions, or other governments to fund its operations or projects. It's like taking a loan to make important things happen for everyone
• Public borrowing plays a crucial role in financing essential government initiatives that benefit society as a whole. It ensures that important projects are not hindered by financial constraints. It's the key to turning government plans into tangible actions that make a positive impact on people's lives.
• Public debt, in one sense, has the revenue effect and, in another sense, has the expenditure effect
• It is said that the net effect of government borrowing is expansionary. If loans are raised for productive purposes, scarce resources may be distributed rationally. In other words, resource allocation will take place to sub-serve national interests. Consequently, national income will rise.
• If loans are raised to finance unproductive activities like repayment of loans

  • Resources may not be allocated in an optimal manner
• Public borrowing does not produce any significant adverse effect on investment
• Public borrowing can produce a favorable multiplier effect on national income
• Government imposes taxes to finance its loan repayment program. High rate of taxes discourages people to work more
• Public borrowing involves transfer of resources (from taxpayers to the lenders)

  • The negative effect of taxes (i.e., desire to work less when taxes are increased) produce unfavorable effects on income
• Because of debt, present generation obtains less capital
• Lower volume of capital reduces production and productivity of an economy
• Public borrowing widens income inequality
• Burden of taxes is mostly felt by the poor people
• Rich people who lend money to the government earns more interest income than what they sacrifice by paying taxes
• If the borrowed amounts are spent for the uplift of the poor

  • Inequality will lessen to some extent
• Loans from banks (say purchase of government bonds by commercial banks)

  • Lead to an increase in money supply and put a great pressure on the price level
• If public debt is used to raise income, employment and output

  • The inflationary effect will then be greatly minimized
• If government borrows money from individuals, rather than banks.

  • Individual borrowers will be forced to curtail their consumption spending, serving as a good anti-inflationary measure.
• Ricardian Equivalence Hypothesis (REH) is an economic theory that says that financing government spending out of current taxes or future taxes (and current deficits) will have equivalent effects on the overall economy
• Ricardian equivalence implies that Keynesian fiscal policy will generally be ineffective at boosting economic output and growth
• Ricardian equivalence was developed by David Ricardo in the early 19th century and later was elaborated upon by Harvard professor Robert Barro
• 4 stages of public debt

  1. Borrowing the Funds
  2. Spending the Funds
  3. Raising revenue for repayments
  4. Actual debt repayment
• Borrowing the funds - Governments get funding in the first phase through bond issuance, domestic or foreign loan acquisition, or financing from international organizations. This borrowing is primarily for financing government spending, addressing budget deficits, or funding infrastructure projects
• Spending the funds - Following the acquisition of funds, the government allocates them to specified goals outlined in the budget, which include social services, infrastructure, defense, and debt repayment
• Raising revenue for repayments - The government uses fiscal policies to raise money through taxes, fees, customs duties, and other sources to pay its debt. To raise money to pay off debt, may entail raising taxes on particular products or services, such as fuel, sugary beverages, and tobacco
• Actual debt repayment - the government eventually returns the principal amount borrowed plus any interest. In loan agreements or bond arrangements, repayment of debt usually follows specified terms or deadlines
• Public debt is the money that a government owes to various lenders, such as individuals, institutions, or other

  governments. It's a result of borrowing by the government to finance its operations, projects, or to cover budget deficits when expenses exceed revenues. This can take the form of bonds, treasury bills, loans, or other financial instruments. The government is responsible for paying back the borrowed money along with any accrued interest over time.
• Marcos Era (1965-1986)

  • During this time, the Philippines borrowed a lot of money from other countries. The amount of debt increased by a huge amount, from $599 million to $26.4 billion by 1985. This borrowing spree mainly happened in the 1970s after the oil crisis.
• Aquino Administration (1986-1992)

  • When Corazon Aquino became president, she faced a global "debt crisis" that made it harder for countries to borrow money. So, during her time, the Philippines didn't borrow as much, only about $591 million per year on average
• Ramos administration

  • During __ presidency, borrowing went up again, even more than during Marcos' time. This was because the Philippines and some other countries in Asia were seen as good places for foreign investors to put their money. So, the country borrowed a lot more, about $2.2 billion per year.
• Estrada Administration

  • When Estrada was the president, borrowing continued to increase at a very fast pace, especially in the first two years of his term. The amount of debt went up by about $2.7 billion each year, mostly from public borrowing
• Public debt management is the process of establishing and executing a strategy for managing the government’s debt in order to raise the required amount of funding at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.
• Don't confuse public debt with external debt. That's the amount owed to foreign investors by both the government and the private sector. Public debt does impact external debt.
• Importance of public debt management

  • In a broader macroeconomic context for public policy, governments should seek to ensure that both the level and rate of growth in their public debt are on a sustainable path and that the debt can be serviced under a wide range of circumstances, including economic and financial market stress, while meeting cost and risk objectives.
• Importance of public debt management

  • Every government faces policy choices concerning debt management objectives, in particular its preferred risk tolerance, the parts of the government balance sheet that debt managers should be responsible for, the management of contingent liabilities, and the establishment of sound governance for public debt management
• Importance of public debt management

  • Poorly structured debt portfolios, in terms of maturity, currency, or interest rate composition and large contingent liabilities, have been important factors in inducing or propagating economic crises in many countries throughout history.
• Importance of public debt management

  • Sound risk management practices are essential given that a government’s debt portfolio is usually the largest financial portfolio in the country and can contain complex and risky financial structures, which have the potential to generate substantial risk to the government’s balance sheet and overall financial stability. Debt crises have highlighted the importance of sound debt management practices and the need for an efficient and liquid domestic capital market
• The Bank-Fund Guidelines for Public Debt Management (Guidelines) published in 2001 and amended in 2003, aim to strengthen the international financial architecture, promote policies and practices that contribute to financial stability and transparency, and reduce the external vulnerabilities of member countries.
• IMPORTANCE OF PUBLIC DEBT

  Public debt plays a crucial role in government financing and economic management. This includes Financing Economic Growth, Counteracting Economic Downturns,

  Smoothing Tax Burdens
• Financing Economic Growth

  • Public debt enables governments to finance investments in infrastructure, education, healthcare, research and development, and other productive sectors of the economy.
  • These investments lay the foundation for long-term economic growth by improving productivity, enhancing competitiveness, and fostering innovation. For example, building new transportation networks or investing in renewable energy projects can create jobs, stimulate economic activity, and attract private investment.