i)

Public debt is defined as how much a country owes to lenders outside of itself. These lenders can include individuals, businesses, and even other governments. The term “public debt” is used interchangeably with the term “sovereign debt.” Public debt is the accumulation of annual budget deficits and results from years of government spending exceeding tax revenues. It includes Treasury bills, notes, and bonds, which are typically purchased by large investors.

In the short run, public debt is a good way for countries to acquire additional funds to invest in economic growth. It also serves as a safe investment for foreigners in a country’s growth by purchasing government bonds.

ii)

When public debt is used as an alternative to taxation, it offers several advantages:

• Public borrowing has an advantage over taxation because taxation beyond a certain limit can negatively affect economic activity by creating disincentives. Public borrowing, however, does not carry the same risk as it is voluntary and carries the expectation of return and repayment.
• Public debt allows governments to invest in infrastructure and social sectors where tax revenues may be insufficient. Debt-financed investments can create additional productive capacity in the economy that would not otherwise have been possible.
• Public debt also supports tax smoothing and counter-cyclical fiscal policies, which help reduce output volatility. It allows governments to align benefits and costs for long-term projects by shifting the tax burden away from current generations.
• Foreign investment through government bonds, which form part of public debt, is a safer alternative to direct foreign investments in domestic businesses.

Consequences of Public Debt on the Economy:

• High public debt leads to large interest payments, which are ultimately borne by taxpayers. This can result in future taxation increases without corresponding economic growth.
• Public borrowing increases demand for credit in the economy, driving up borrowing costs, making it more expensive for businesses to invest in equipment and other capital goods, increasing the cost of doing business.
• Excessive public debt can lead to currency collapse or depreciation if governments resort to printing money to finance the debt.