Question

QUESTION 3 Public debt arises as a result of financing successive budget deficits through borrowing. The public debt stock as at March 2020 stood at GHC 236.1 billion according to the Bank of Ghana. There have been arguments for and against borrowing by government and the opposition all these years depending on where they find themselves.

As a student of Public Finance, is borrowing good or bad? Justify your position by coming out with all the relevant arguments for and against your decision.

Answer 1

public debt is the main source of income for any government. The government will have to borrow to rectify the deficiency in their regular income so that it can raise revenue. All countries of the world borrow and use it for its development activities. Such loans received by public authorities will have to be repaid.

Government borrowings are known as public debt. Let us examine the ways in which lending helps the government
1. Maintain economic stability: The government has to borrow to rectify the financial instability caused by the economic fluctuations. When the economy is depressed, borrowed money can be used for public works and infrastructure.

2. Funding for Economic Development: For the underdeveloped countries, the main problem is capital poverty. The best option in this situation is to buy public debt. African countries borrow this way.

3. To raise the necessary funds for enterprises: Government-owned businesses have to borrow from the government to finance them.

4. Facing Unexpected Costs: The government often has unexpected expenditures. For example, the public sector helps to cope with unexpected events such as earthquakes, floods, epidemics, famines and wars.

5. To bear the costs of war: Modern wars are very expensive. The cost of defense needs does not come solely from taxes. Therefore, the government is borrowing.

6. To provide basic amenities: Roads, railways, bridges, airports and health services, the government has a huge cost. The government is borrowing for this.

7. To share resources better: The government is borrowing to remedy the resource imbalance.

8. Implement welfare plans: Modern governments are welfare nations. The government has responsibility for good education and health. The government is borrowing from these activities.

Governments generally borrow both internally and externally

Buying public debt in a country is beneficial, but it also has some disadvantages. 1. Public debt is considered a difficult task and can be expensive. 2. It is likely to undermine the economic development of the country. Because it is easy to buy, but paying interest is difficult. 3. It presents a challenge to political independence. When many underdeveloped countries borrow excessively from large countries, they have to act in the interests of that big country. 4. The national wealth is likely to lose out in the form of interest.

It merely implies danger. The government needs to plan for borrowing for essential things.