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.

• Treasury bill

• Government bonds

• Zero-coupon bonds

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).

Period Public debt (year-end) as % of

GDP, period average

1994 – 1999 49.0

2000 – 2004 40.9

2005 – 2009 29.0

* 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

• 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.