Public Debt: The government's credit card to borrow funds

Borrowing can help fund development projects, manage emergencies, and drive growth.

Think of public debt as the government’s credit card.

When taxes and other revenue sources aren’t enough to cover spending, the government borrows to bridge the gap. Public debt refers to the money borrowed by the government to meet its expenses when its revenue falls short. This debt can be raised from domestic sources, like bonds or loans from financial institutions, or from external sources, like loans from foreign governments or international organisations.

Borrowing can help fund development projects, manage emergencies, and drive growth. But just like with a credit card, excessive public debt can create long-term financial challenges if not managed wisely.

Types of public debt

Internal Debt:

Borrowed from within the country through instruments like government bonds or loans from domestic banks. For example, when you invest in government securities, you’re essentially lending money to the government.

External Debt:

Borrowed from foreign lenders, including international institutions like the World Bank or foreign governments. External debt is often used for large-scale infrastructure or development projects.

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Why does the government take on public debt?

To fund deficits:

When revenue from taxes and other sources isn’t enough to cover expenditures, the government borrows to fill the gap.

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For infrastructure and growth:

Borrowing allows the government to invest in long-term projects like highways, railways, and energy, which drive economic growth.

During emergencies:

In times of crises, like a pandemic or natural disaster, public debt helps fund relief measures and keep the economy afloat.

Why should you care about public debt?

Impact on taxes:

Higher public debt can lead to increased interest payments, which may result in higher taxes or reduced spending on public services in the future.

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Effect on inflation:

Borrowing from domestic sources can increase money supply, potentially leading to higher inflation, which impacts your purchasing power.

Economic stability:

Excessive public debt can create concerns about the government’s ability to repay, affecting investor confidence and leading to higher borrowing costs.

How is public debt managed?

The government uses various strategies to ensure debt remains sustainable:

Fiscal consolidation: This involves reducing deficits through measures like cutting unnecessary expenses, improving tax collections, and boosting economic growth.

Debt restructuring: Renegotiating repayment terms or replacing costly debt with cheaper alternatives.

Efficient borrowing: Prioritising borrowing for productive purposes, like infrastructure, rather than operational expenses.

What to watch for in the Budget?

Keep an eye on:

The government’s public debt levels and how they compare to GDP (Debt-to-GDP ratio).

Measures for fiscal consolidation to manage or reduce debt sustainably.

Allocation of borrowed funds—whether they’re going toward growth-oriented projects or recurring expenditures.

Public debt is a critical tool for managing the economy, but like any borrowing, it needs to be used wisely. Understanding how and why the government borrows can help you see the bigger picture of how national finances impact your life, from taxes to inflation to economic opportunities.