Lecture Public economics (5th edition) - Chapter 16: Public debt and debt management

Learning objectives of this chapter include: Define public debt; describe salient characteristics of the size, composition, and nature of public debt in South Africa; explain and compare different theories of public debt and evaluate them critically; argue the relative merits of debt and tax financing of government expenditure; define public debt management; identify and describe the different types of public debt cost; identify the goals of public debt management and discuss their pursuance, with special reference to South Africa.

• • • • • • • Define public debt Describe salient characteristics of the size, composition, and nature of public debt in South Africa Explain and compare different theories of public debt and evaluate them critically Argue the relative merits of debt and tax financing of government expenditure Define public debt management Identify and describe the different types of public debt cost Identify the goals of public debt management and discuss their pursuance, with special reference to South Africa Public debt may be defined as the sum of all the outstanding financial liabilities of the public sector in respect of which there is a primary legal responsibility to repay the original amount borrowed (sometimes called the principal of debt) and to pay interest (sometimes called debt servicing) • • • Treasury bill Government bonds Zero-coupon bonds Period Public debt (year-end) as % of GDP, period average 1960 – 69 44.7 1970 – 79 39.7 1980 – 89 32.4 1990 – 94 41.1 1994 – 1999 49.0 2000 – 2004 40.9 2005 – 2009 29.0 2010* 33.5 * Preliminary figure Source: South African Reserve Bank, Quarterly Bulletin • • • • • • • Debt trap Ownership distribution Current expenditure Capital expenditure Net worth Net indebtedness Consul • • • • • • • • • Inter-temporal burden Domestic or internal debt Foreign or external debt Internal vs external debt and the burden on future generations Inter-temporal burden Fiscal neutrality and Ricardian equivalence Fiscal activism and Keynsian demand management The crowding-out phenomenon The public choice view • • • Allocation efficiency Distribution (equity) Macroeconomic stability Objectives • Minimisation of state debt cost • Macroeconomic stability • Development of domestic financial markets • Financial credibility • P = E/I • • • • • • Primary dealers or market makers Government net worth Mark to market Discount price Bond discount Foreign exchange cost • • • Horizontal or flat Negatively sloped or inverse Upward sloped or positive Two questions • Can the country service its debt? • Will the country service its debt? • Explicit – Government guarantees on foreign exchange borrowings • Implicit – No contractual obligation to provide assistance but does so ... of debt and tax financing of government expenditure Define public debt management Identify and describe the different types of public debt cost Identify the goals of public debt management and. .. • • • Define public debt Describe salient characteristics of the size, composition, and nature of public debt in South Africa Explain and compare different theories of public debt and evaluate... or external debt Internal vs external debt and the burden on future generations Inter-temporal burden Fiscal neutrality and Ricardian equivalence Fiscal activism and Keynsian demand management