What are the redemption methods of Public Debt?
What are the redemption methods of Public Debt?
Or
Mention the various methods of debt redemption and discuss any two of them in detail.
Ans.
Redemption methods of Public Debt
The responsibility of the redemption of the public debt lies with the government. Following are the methods of debt redemption-
(1) Surplus Budget: The easiest method of repaying the public debt is that the government makes a surplus budget. It implies that the government revenues should exceed expenditure. For it, additional taxes are imposed.
Increase in other means of income is made and expenses are contained within a limit. Thus, the saving accumulated in the budget is used for the redemption of debts. This redemption may be made in two ways – Firstly, the government buys debentures, in the open market, of the value equal to the total debt. Secondly, redemption of the public debt is made gradually, as per convenience. In the modern times, surplus budget is not much in vogue because all governments are preparing deficit budgets instead of the surplus budgets.
(2) Terminable Annuities : In this system, the government pays back the amount of public debt in terminable annuities. The government first decides that in how many years the total amount of debt and the interest thereon is to be redeemed. After it, annuities of the public debt are fixed. Creditors are made payment either proportionately to their credit or according to the serial number of their debentures. The advantage of this method is that the total burden of debt is distributed over the period of a few years, and the government has to pay back only a part of debt every year.
(3) Sinking Fund Method: One of the methods to redeem public debts is that the government sets up a sinking fund. A fixed amount is deposited in this fund every year. This amount is invested somewhere. Thus, the interest of this amount goes on accumulating. Out of the amount so accumulated every year, the debt is repaid at a specific time. This fund is established for such debts as have to be redeemed, in lump sum. The advantage of this method is that by depositing a fixed amount every year, the government budget does not get burdened.
(4) Conversion or Buying up of Loan: In the modern age, it is a popular method of redeeming public debt. In this method, when the time for the repayment of a debt approaches, the government secures new loans. The amount received through this new loan is used to redeem the old debt. The old creditors, too, are given option to buy new loans (debentures) against their old debentures If the new loans have a higher rate of interest, the creditors get the old loans easily changed in the new debts. Sometimes, the rate of interest in the country decreases. In such a situation, the government redeems old debts and secures new debts at a lower rate of interest.
(5) Refusal from Payment or Repudiation of Debt: Sometimes, the government refuses to repay the loan owing to an emergency or political revolution, etc., in the country, and the debt is considered to be repudiated. It is not a good method because if the government refuses the payment of the loan once, it will not be possible for the government to secure a loan again.
(6) Special Capital Levy Method: In order to redeem the public debt, the government can impose a special tax on the property of people. This tax is called Capital Levy. The amount collected through this levy is used to redeem the public debt. This method was, especially, suggested by Dalton, after the First World War.
(7) Payment of External Debt: In order to redeem the foreign debt.it is essential to accumulate foreign exchange. For it, it is imperative to increase the exports of the country. In order to increase the exports, only such industries should be established which produce export goods. These debts can also be redeemed through new external debts over a short period.
