Various Methods of Public Debt Redemption - Repayment of Loan

What is Redemption ? Meaning ↓

Redemption means repayment of a loan. Redemption refers to escaping from the burden of public debt.

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Various Methods of Public Debt Redemption ↓

The various methods of public debt redemption are as follows :-

1. Sinking fund method

The Government creates a fund called sinking fund by accumulating a part of the public revenue every year for the repayment of debt. This is the most systematic and best method of debt redemption. The burden of debt is spread evenly over the period of accumulation of the fund. Sinking fund creates confidence among the lenders and increase the credit worthiness of the government.

2. Capital levy

A direct tax upon the capital of the tax payers is called capital levy. It will be generally imposed in times of emergencies. Dalton recommended this method very strongly. It was advocated as a method of liquidating the unproductive war debts. Debt redemption by imposing a very heavy taxation on property has been advocated. However, this method has raised objections as heavy taxes might lead to undesirable effects on the economy.

3. Conversion

Conversion is not repayment, it is only exchange of new debts for old. It is the process of converting or altering a loan with a given rate of interest into a loan at a lower rate of interest. This may take place at the time of maturity or before the time of maturity by the voluntary acceptance. The main advantage of conversion is that it reduces the interest burden of the state and relieves tax payers. For this purpose, the government had to maintain an adequate stock of securities for a smooth functioning of this method.

4. Refunding

Refunding implies the issue of new bonds and securities by the government, to repay the matured loans. The short term securities are replaced by long term securities. The owners of the old debt have the option of subscribing to new debt or opt for cash. Under this method, the burden of repayment of public debt is postponed to a future date.

5. Terminable annuities

The fiscal authority clears off a part of the public debt every year by issuing terminable annuities to the bond holders which mature annually. It is a method of redeeming debts by instalment. The burden of debt goes on diminishing annually and by time of maturity it is fully paid off.

6. Redemption by Purchase

In this case the government pays off debts by purchasing securities even before the maturity whenever it has surplus budget. However, surplus budget is a rare phenomenon in modern times.

7. Additional Taxation

The government imposes new taxes to get revenue to repay the principal and interes of the loan. This is the simplest method of debt redemption. If new taxes are levied to repay long term debts, the burden is imposed on future generation. This method causes a redistribution of income from the tax payers to the bond holders.

8. Surplus balance of payments

External debt redemption is possible only by accumulating foreign exchange reserves. Hence it is necessary to create a trade surplus by increasing exports and reducing imports. External debt can also be reduced by changing the terms of repayment. The loans raised must be used productively so that they are self liquidating posing no real burden on the economy.

Conclusion On Public Debt Redemption Policy ↓

The best redemption policy is to clear off internal and external debt annually so that there is no mounting burden of debt upon the present generation or on posterity. Proper and efficient management of public debt calls for active, participation policy which is inevitable for price stabilization.