Question

Explain four ways of redemption of public debt.

Answer 1

1. Sinking fund approach: A sinking fund is a separate fund created by the government to repay its debt. The government deposits a fixed amount from its revenue every year into this fund. The accumulated amount is used to pay off the debt, both principal and interest, gradually as they fall due.
2. Conversion approach: Conversion of loans is another method of redemption of public debt. It means that an old loan is converted into a new loan. Under this system, 111 high-interest public debts are converted into low-interest public debts. Prof. Dalton felt that debt conversion actually relaxes the debt burden.
3. Utilization of budgetary surplus: When the Government earns a budget surplus, it must be utilized to pay down the debt. A surplus occurs when public revenue exceeds public expenditure. However, this method is rarely found.
4. Terminal annuity: Under this method, the government repays the debt in equal annual installments, called annuities. These installments include both interest and principal. Instead of paying off the entire debt at once, the debt burden is reduced progressively every year until it is fully paid at maturity.