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Government Debt Is Described in "The Law On Public Debt Management"
Government Debt Is Described in "The Law On Public Debt Management"
deficit and encourage the investment. There are some causes which create budget
deficit such as crisis, tax losses, ineffective public investment, consumption of the
Government, etc,. When budget deficit occurs, there are also some tools to resolve
the problem such as increase the taxes and decrease consumption, issue more
money, but the easiest and fastest way is to borrow. As a result, public debt occurs
to balance the deficit.
From a legal perspective, it is crucial to define public debt because “it has
implications for the types of public institutions and instruments that are governed
by the requirements of the public debt management legal framework.” However,
currently, “there is no universally accepted definition of ‘public debt’ and various
jurisdictions define this differently, with varying policy implications.” Therefore,
it is critical that the legal framework of a given country clarifies clearly the scope
of public debt.
And local government debt means “a debt signed or issued by or under the
authorization of the People's Committee of a province or centrally run city (below
referred to as provincial-level People's Committee)”.
Public debt can also be divided based on term of the loan. According to the
law mentioned above, there are three kinds of loan. Short-term loan has the debt
time less than one year. Medium or long-term loan is the loan expired in one year
or more.
Besides, the above items may limit the operation of the SOEs and non-
business unites and, therefore, potentially curb the investment. According to the
IMF (2015), “the decision of whether or not to include loans of a SOE in public
debt should be based on its risk to the fiscal situation. Two binding criteria to
identify a business with high risks include: (i) its activities are almost entirely
funded by the state budget (quasi-fiscal activities) and (ii) it operates with negative
operating balances”. Nevertheless, other relevant indicators should also be
considered whether to put into public debt concept, including the management
independence of SOEs, ties with the government, the frequency of auditing, the
activities of publicizing annual report on comprehensive operations and the
protection of shareholders' interests, the sustainability and financial indicators, and
other risk factors.
Public debt can be created by “issuing bill, draft, bond, public bond or other
instrument which gives rise to a debt payment liability”. These instruments help
collect funds from both domestic and foreign objects. Sometimes, some countries
directly borrow funds from a supranational organization (for example the World
Bank) or international financial institutions.
There are three main opinions towards the impact of public debt on the
economic growth. The first one is that public debt can promote economic growth,
which representative is John Maynard Keynes, who believes that if public debt can
be maintained at a reasonable ratio, it can promote growth by increase capital
resource for the Governments. It is especially important for developing countries
which need more funds to improve their infrastructure. Besides, the Governments
borrow more money to consume will affect the total consumption of the whole
country, which gradually increase demand for goods and services and labors. Other
researches of Aschauer(1989), Eisner(1989), Heng(1997), Lê Thị Minh Ngọc
(2011) gave the same result.
The second one is that public debt constrains the growth. Ricardo (1970s) and
Robert Barro(1989) think that cutting taxes are replaced by public debt does not
encourage consumption in short-term because it does not increase the regular
income of individuals. It only moves taxes from present to future. As a result,
people still have to pay the taxes and interests from it in the future, and this even
leads to worse situation. Checherita-Westphal and Rother (2010), Hameed and
fellows (2008), Reinhard and fellows (2012), Presbitero (2006),… showed the
same opinion.
The third opinion is that public debt can both constrain and promote
economic growth. According to James and fellows (1986), when economic growth
ratio is greater than the average interest rate of public debt, public debt is good for
economic growth since it creates more value than cost. In this case, the
Governments do not need to increase taxes to pay for the debt. In adverse, when
the average interest rate is higher than economic growth ratio, public debt brings
back some risks for the countries. Other researches of Elmendorf and Mankiw
(1999), and Teles and Mussolini (2014) also indicated that public debt can both
pose some risks and encourage to economic growth of a country.
These above researches do not have the same result, however, they all show
the close relationship between public debt and public debt management. Even
public debt is good or bad for economic growth, it is necessary to manage public
debt well