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Historically, one of the main challenges to government leaders is the generation, and the application of a country’s wealth and resources towards “three main duties of great importance. These are as follows: protecting the country from violence and invasion; protecting, as far as possible, every member of the society from oppression and injustice, and thirdly, erecting and maintaining public works, public institutions, which can never be for the interest of any individual or group of individuals. Financing the state was basically through revenue raised through “taxes of one kind or another (Smith 476).1 Public debt was not unheard of, but was held suspect.
In the last two decades, most countries have been experiencing periods where their outlays exceed their revenues, with no balanced budget in sight. Governments faced the formidable task of managing runaway budget deficits and growing public debts, both internal (owed to nationals), and external (owed to foreigners). To cover the shortfall or deficit, governments sell public assets, levy taxes, print and/or borrow money. Government borrowings to finance deficits create “public” debts, which need to be serviced through interest payments or through refinancing. Obligations of government resulting from issuing guarantees for a public sector enterprise added to the public debt become what are known as the “federal debt (Iqbal 2)2.”
Available data showed that by 2007, 124 countries had been running on borrowings and that many of these countries had breached the acceptable level of public debt -to -GDP ratio. The US debt-to-GDP ratio had risen to 60.8 % in 2007. Other countries exhibited higher debt-to- GDP ratio; Japan’s debt-to-GDP ratio reached 170%, Germany, 64.9%, and Canada, 64.2 %( Nationmaster1)3. Public debt and budget deficits had become a global phenomenon and the principles of balanced budget and surplus became part of a
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There has always been a debate over the equity and debt financing for capital structure and it still continues (Becker & Stromberg, 2010). The increasing importance of debt financing in modern era of business has encouraged for the study of debt financing, which will be discussed in this paper.
However, Wallison (2012, p. 71) expressed the view that “in a true sovereign debt crisis, a country cannot meet its debt obligations, largely because it does not have enough of the currency in which its debt is denominated.” The European sovereign debt crisis began in 2008 with the banking crisis in Ireland with the contagion of the crisis spreading out to Greece, Ireland and Portugal in 2009 (Investopedia 2012).
Deficit, Debt and Political Theory of Government Debt Introduction Budget Deficit being highly dangerous vs. Ricardian Equivalence The theory of Ricardian equivalence is a theory of Economics by Robert Barro. The theory states that when a government proposes a tax cut to increase consumer spending, this leads to a higher budget deficit financed by more treasury bonds, which does not lead to much economic growth.
However, there are cases where the revenue from taxation has not been enough and hence governments have resorted to borrowing. This paper has examined the relationship between tax and debt. There is a general observation that the level of tax may not necessarily determine the debt accumulation rates.
It hs generted series of intrctble problems with no esy solutions. ccordingly, lthough ll world leders, including the Pope nd Nelson Mndel, hve clled for the elimintion of debt, technicins hve not found solutions stisfctory to both debtors nd creditors. Prt of the reson for this lck of consensus is tht debt does not exist in vcuum.
Developing countries are faced with low standards of living, underdevelopment, and high poverty levels, weak and unstable currencies, low capital levels and low GDP. All the above problems faced by developing countries are caused by debts which affect not only those who acquire loans but also generations that follow.
In other words, fiscal deficit will put each citizen of a country indebted to some external financial sources. Thus even the new born babies are indebted to somebody even from the beginning of their life on earth. It is essential for a government to