How to Discharge a Public Debt

A government must borrow money to finance its operations. This money owed is called the public debt. The standard manner in which a government borrows money is by selling securities or government bonds. These are essentially promises of payment within a fixed duration of time and the invested money earns interest. These government bonds could be sold domestically or to foreign investors. A less sustainable way of borrowing money is through direct loans from international financial institutions. Thus, there are two broad categories of public debt: internal--owed to domestic lenders--and external--owed to foreign lenders. Besides unpaid securities and foreign loans, a nation's public debt can also include other liabilities owed by its government such as contracted goods and services that have yet to be paid. A nation's public debt is often presented as a percentage of its gross domestic product (GDP). This is done to provide one of many indicators of the national economic state. There are several ways that a government can discharge public debt, the form and manner usually dependent on political and economic conditions.

Instructions

1

Increase revenue through higher taxes. The government's main source of income is taxes. To be able to pay back the money it borrowed, government must increase its revenue. Thus, the most often used solution to public debt is to raise taxes. This naturally is not a popular remedy, but it is an inescapable fact that public debt ultimately rests on the shoulders of a nation's population. A milder resolution is to improve tax collection, which can be done by instituting more efficient mechanisms.

2

Create a new and more logical budget. A nation's budget deficit is the difference between its government's revenue and spending. The government deficit is not equal to the public debt, but an increase in the former logically results in an increase in the latter. Bad or poorly planned government spending and non-productive investments contribute much to an increase in the budget deficit. Curbing expenditures is certainly not enough. Policy and decision makers may need to reprioritize the budget. This may involve administrative and/or legislative reforms.

3

Privatize government programs that are not working effectively. A badly structured bureaucracy can often lead to weak management and performance of public services. This also provides a breeding ground for graft and corruption. Unfortunately governments often have this undesirable tendency to throw money at a problem in the hope that the situation will be resolved. This, of course, does nothing to improve the public debt. Sometimes the only way is to privatize some public service institutions. This could at least increase an institution's productivity while reducing government payroll.