Federal debt - Research Paper Example

all the state loans whether it is incurred for exploiting the natural resources of a country or for meeting or preparing for the war, or any commercial purposes, etc. is termed as Government Debt. (Hansen, 1941) The federal debt is created because the annual deficit of the government when the receipts of the government in a current year falls below the government spending. (Butler) This deficit is the amount that the government has to finance from other sources. The nature of the government debt is such that it is the debt of the people of the country which is why it is also known as the public debt as the government has to repay that debt by the amount it generates from the public in form of taxes.

Therefore, it can be said to be the taxpayer’s indirect debt. (Peavler) State can raise loans in different forms. It may obtain loans from people within the country or from other states or by issue of inconvertible paper currency. There is always a limit of borrowing in each case whichever method is adopted by the state. If that limit is crossed, the country is bound to suffer. We discuss below the various forms of state borrowing and also the limit to which the state can borrow. When the state finds it difficult to raise its revenue by taxation then it resorts to borrowing from citizens and financial institutions within the country.

That may fall into short term loans or long term loans or both. Now, it depends upon the socio-economic conditions of the country that how much loan the state will obtain. The state can also raise loans from the Central Bank of the country. The Central Bank purchases the government securities, bonds and debentures from the government and advances loans against them. It is that loan which is raised through international money markets, foreign governments and international agencies such as IMF.

When state requires wealth, it makes effort to get as much loan as it can from other states. Foreign governments take into account many