The Government Debt - Essay Example

? GOVERNMENT DEBT Location Government Debt Government debt refers to the amount of money owed by the government to individuals, institutions and other government. The government debt includes the total amount owed by various branches of the government ranging from the municipalities, state to the federal government (Barro 2008, p. 29). Government debt can be classified into two categories namely the internal and the external (Chamberlin and Yueh 2006, p.86). Internal debt refer to the amount of funds collected within the country from local investors and government run institutions such as pension trust fund. External government debt refers to the aggregate funds collected from outside the country from foreign investors and governments. According to Gartner (2006, p. 68) the government will always sell its securities in the open market when it wants to raise funds from the investors. Key traded government securities in the open market include but not limited to treasury bills, notes and bonds (Snowdon & Vane (1997, p.103). Sovereign debt refers to government debt owed to investors mostly foreign in foreign currencies. Shone (1989, p. 119) states that Sovereign debts are normally used by the government when they are in need of large amount of money to carry out an expensive public project. Sovereign debt is considered risky owing to the fact that it is affected by fluctuation in currency and any default by the issuing company may translate to low credit rating and no further debt advancement as foreign investors will be scared away. Government bonds, which is the common form of raising revenue from local investors in local currency is highly preferred by most government because it is not affected by the credit rating of the country (Miles & Scott 2005, p.19). It is unfortunate that the United Kingdom government debt has been growing at an alarming rate over the recent past. The global recession that began in 2008 has left several developed nation into huge debts. Carlin and Soskice (2006;101), asserts that the UK higher budget deficit can be attributed to the large government spending and low government revenue owing to loss of jobs and reduced spending. The UK society has been enjoying the deficit sending without a glimpse at its consequences. The United Kingdom debt which includes the aggregate amount of money owned by the central government in form of government bonds, sovereign bonds, Social Security trust fund, and accrued capital expenditure. Fiscal consolidation refers to the policies taken by the government to manage its debt and reduce its budget deficit. Fiscal consolidation policies vary from country to country depending on the financial objective of the government. Most countries are always caught up in dilemma when it comes to fiscal consolidation especially during recession. Most economies have been unstable since the beginning of recession as unemployment rate increases from time to time, key companies facing financial constraints and individuals losing mortgages and thus it becomes difficult for the government to decide whether to come up with economic stimulus or fiscal consolidation policies. For instance the UK government has been facing bulging public debt and budget deficit while the same time unemployment rate is escalating unprecedentedly. Tobin theory is a theory of investment behavior also renowned as Tonin’s Q Theory and denoted by letter “q”. This theory is used to determine the ratio of the companies issued shares (share capital) to the replacement cost associated with the assets of the company. Three significant situations are evident when relating the market value and the replacement cost and they include “q” being greater (q>1), lower (q Read More