a. What is public debt? b. Outline any three reasons why counties borrow. c. Highlight any three effects of a huge national debt on the economy of a country...

Answer Details

a. Meaning of public debt. Public debt (national debt) is the total amount of money that a government owes to individuals, business firms, financial institutions, other governments and international organisations as a result of its borrowing, together with the interest payable on it. It is made up of internal debt (owed to lenders within the country) and external debt (owed to lenders outside the country), and the government is legally obliged to repay it.

b. Reasons why countries borrow.

• To finance a budget deficit: when planned government expenditure exceeds expected revenue, borrowing bridges the gap.
• To finance capital/development projects: roads, schools, hospitals, dams and other infrastructure require large sums that current revenue cannot cover.
• To meet emergencies: war, drought, flood or other disasters call for sudden heavy spending.

(Other acceptable reasons: to correct a balance-of-payments deficit, or to repay/service an existing debt.)

c. Effects of a huge national debt.

• Heavy debt-servicing burden: a large share of revenue is used to pay interest and principal instead of financing development.
• Higher taxation: government raises taxes to repay the debt, reducing disposable income and discouraging effort and investment.
• Loss of economic independence: external creditors may impose harsh conditions, weakening the country's control over its own economic policy.

(Other valid effects: inflation, currency depreciation, and reduced future consumption as today's borrowing must be repaid by future generations.)