SUBJECT: MEM 605 FINANCIAL

MANAGEMENT IN EDUCATION

REPORTER: HAZEL V. CASALDON

 TOPIC:
ECONOMIC ASPECTS OF
THE PUBLIC DEBT
• To some, the incurring of debt is a
symptom of bankruptcy (although
theoretically speaking, the government
cannot be bankrupt in a manner the
private firm would), of irresponsible
fiscal management, to others, it is
somehow or other correlated with
elections or electioneering, and with
graft and corruption.
•
 PUBLIC DEBT VS. PRIVATE DEBT
• The public debt is the total amount of debt
a central government or country owes. It is
also known as national debt. The debtors
can be the government, corporations or
citizens of that country. The estimated
Philippines public debt under the Aquino
administration in 2016 was $ 972,678.
 THE DIFFERENCE BETWEEN PUBLIC
AND PRIVATE DEBT?
Private debt
• Private debt is the debt accumulated by individuals or
private businesses. Private debt can take numerous forms; a
personal loan, credit card, corporate bond or business loan
for instance.
• Private debt comes with numerous pitfalls and risks for the
applicant. When a loan is provided by family or friends,
missed repayments can cause tension and even result in the
end of relationship. Debt incurred with a credit provider may
result in high levels of interest, charges for missed payments
or demands for security.
Public Debt
• Public debt, or national debt, is the sum of the
financial obligations incurred by all government
bodies of a country. This debt can be accumulated by
the government directly or a government agency at
any level.
• Pubic debt can arise from a number of sources, for
example government bonds create a debt owed by
the government to a member of the public.
Alternatively, Sovereign Debt is accumulated when
the government of a country borrows money from
the government of another.
• The public technically owns the debt.
However, the debt will be viewed by the
rest of the world as linked to the country
as whole. The choice to create public debt
is ultimately not that of its owner, and is
entered into by a few but paid for by many.
 IMPLICATIONS OF DEBT
• When a person or a private business uses debt, it is
placing a burden on itself to repay the funds, with
interest, in the future. Taking on private debt
requires borrowers to assess their income and
expenses to determine whether they can easily
repay the funds. Public debt, on the other hand, is
incurred by a small number of people on behalf of
the public at large.
 STRATEGIC DEBT
• Both public and private debt can be used strategically.
Individuals and businesses can use debt to build their credit
reputations in anticipation of large purchases, such as real
estate transactions, in the future. Companies also can use debt
to fuel growth strategies designed to boost income and profit,
which can more than make up for the extra interest expense.
Governments can use debt to finance emergency response
initiatives or to provide needed public services that raise
citizens' quality of life and increase their access to reliable
jobs. Using debt to financing job-related initiatives can have
the same effect as debt-financed company growth plans: If
more more people have a steady income, it will be easier to
repay the debt and boost gross domestic product.
 THE BURDEN OF DEBT
Burden- referred to “real burden”

A debt burden is a large amount of money

that one country or organization owes to
another and which they find very difficult
to repay.
 TRADITIONAL VIEWS ON THE
BURDEN OF PUBLIC DEBT
• The traditional view is that public debt as in the case
of private debt imposes a real burden on the
community. The classical view maintains that if the
government expenditure is financed through taxation
the present generation bears the burden. But if
government expenditure is financed through public
borrowing, the present generation gets relieved from
the cost and burden is shifted to the future genera-
tion.
• The future generation suffers when
present generation reduces its saving in-
order to meet the debt finance and leave a
smaller amount of capital resources for the
future. This will reduce the productive
capacity of the future generation and
accordingly they will stand to lose.
 DIRECT MONEY BURDEN:
• Repayment of public debt involves payment of
interest and the principle by the government.
Hence the government will have to raise the
necessary resources by way of taxation.
• The direct money burden of public debt consists
of the tax burden imposed on the public and it is
equal to the sum of money payments for interest
and the principle components. In the case of an
internal debt, there will be no direct money
burden because all the money payments and
receipts cancel out.
 DIRECT REAL BURDEN:
• Real burden of public debt refers to the
distribution of tax burden and public
securities among the people. In a sense, it is
the hardship sacrifice and loss of economic
welfare shouldered by the taxpayers on
account of increased taxation imposed for
repayment of public debt.
• It is a fact that people hold public debt and they also pay
taxes towards the cost of debt service. If the proportion
of taxation paid by the rich towards the cost of debt,
service is smaller than the proportion of public securities
held by them, whereas, if the proportion of taxation paid
by the poor and middle-income group towards the cost
of debt service is larger than the proportion of public
securities held by them, there is a direct real burden
from public debt.
• Whereas suppose government bonds and securities are
held by the working classes, while the taxation towards
the cost of debt service is paid by the rich only, then
public debt will help to reduce the inequalities of income
in the community. In such a circumstances there is no
direct burden; instead there is a direct real benefit to the
community.
 REPRODUCTIVE AND
DEADWEIGHT DEBT
• Productive or Reproductive debt- Public debt is
productive when it is used in income-earning enterprises.
Or productive debt refers to that loan which is raised by
the government for increasing the productive power of
the economy.
• A productive debt creates sufficient assets by which it is
eventually repaid. If loans taken by the government are
spent on the building of railways, development of mines
and industries, irrigation works, education, etc., income of
the government will increase ultimately.
• Productive loans thus add to the total productive capacity
of the country.
• Deadweight debt- one where there is no existing
corresponding assets
• Public debt is unproductive when it is spent on
purposes which do not yield any income to the
government, e.g., refugee rehabilitation or famine
relief work. Loans for financing war may be
regarded as unproductive loans.
• Unproductive loans do not add to the productive
capacity of the economy. That is why unproductive
debts are called deadweight debts
 DEBT CEILING

• The establishment of borrowing ceilings

by statute stems from the belief that a
country cannot borrow an amount
beyond its capacity to repay. At best
these ceilings are mere approximations
of the country's debt capacity
 LIMITS ON DEBT:
Statutory limits
A statute of limitations is the limited period of time creditors or
debt collectors have to file a lawsuit to recover a debt.
Most statutes of limitations fall in the three-to-six year range,
although in some jurisdictions they may extend for longer
depending on the type of debt. They may vary by:
• State laws
• What type of debt you have
• Whether the state law applicable is named in your credit
agreement
Normal limit
• is dictated by the needs of the economy
itself.
• varies in relation to the needs for fulfilling
certain defined goals— stabilization,
distribution, allocation.
• It is a matter of functional finance
DEBT RETIREMENT
• The act of paying off a debt completely. If one borrows a
certain amount, one must eventually repay it to the
lender and retire the debt.
Refinancing
• Refinancing is the process of replacing an existing loan
with a new loan.
• The new loan pays off the current debt, so that debt is
not eliminated when you refinance. However, the new
loan should have better terms or features that improve
your finances.
• Refinancing program has been accomplished thru the
cooperation of the Central Bank, PNB, DBP, Veterans
Bank, SSS and GSIS.
CONCLUSION:
According to the South China Morning Post on May 12, “Philippine
Secretary of Budget and Management Benjamin Diokno estimated some
US$167 billion would be spent on infrastructure during Duterte’s six-year
term, under the slogan ‘Build! Build! Build!’.” That could increase current
Philippine national government debt of approximately $123 billion, to
$290 billion. But that does not include interest. High rates of interest that
China, the most likely lender, could impose on the new debt could balloon
it to over a trillion U.S. dollars in 10 years. More likely according to my
analysis, at 10% interest the new debt could go to $452 billion, bringing
Philippines’ debt: GDP ratio to 197%, second-to-worst in the world. That
understates the burden to the Philippines, as existing national government
debt would also accrue interest over that time, and such interest was not
included in the analysis. Dutertenomics, fueled by expensive loans from
China, will put the Philippines into virtual debt bondage if allowed to
proceed.