An analytical approximation for the scalar Green function in Kerr spacetime

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▪ To mitigate the adverse effects of contingencies

▪ To increase the provision of public goods.

▪ In a worse scenario, government incur deficit to finance existing debt (debt servicing).

▪ Huge capital expenditure, but most often, huge current and re-current expenditure.

Deficit financing involved funding and expansion of government expenditure. In developing countries, government revenue or income is often not enough. Government has to borrow. Below are the major financial sources of deficit financing:

➢ Borrowing from domestic economy. Government can borrow from the financial institutions, but it can affect the private sector by increasing the rate of interest.

➢ Issuance of both short term and long term financial instruments like treasury bill and bond.

➢ Government can borrow from foreign countries and foreign creditors. Some of these include London and Paris Club of creditors

➢ The International Monetary Fund (IMF) and World Bank also give loan to countries to offset recurrent expenditure and capital projects.

For developing countries, the long run implication of deficit financing is huge deficit which must be paid back. Since the ability of paying depends on revenue which often is not substantial enough, then countries go into deficit overhang and unfavourable balance of payments and are unable to embark on profitable and successful developmental programmes.

Self-Assessment Exercise

Highlight four reasons why government has to finance its expenditure with deficit

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3.6.2 Effect of Deficit Financing on Economic Growth and Development

Deficit financing has implication on economic growth and development of a country. It has both positive and negative effects. The list of the effects is endless and vary across countries. However, some of the negative effects of deficit financing common in a typical developing country (like Nigeria) are highlighted below:

✓ Deficit financing of government expenditure gradually removes a nation’s sovereignty and consequently impedes economic growth.

✓ It opens a nation to international dependency.

✓ It can cause inflation. Inflation is increase in general price level. More debt requires conditions in which one is domestic currency devaluation. This leads to increase in the prices of foreign imported goods, bearing in mind that a developing country like Nigeria is an import dependent country.

✓ The pace of economic growth and development becomes sluggish because of the need to pay or service debt from revenue which could have been utilized for development.

✓ Rapid population growth placing high demand on infrastructure which in turn requires government spending. However, since government revenue is not always enough, there must be deficit financing.

✓ Financing public projects with deficit might generate “crowding out” effect.

✓ In the wake of poverty alleviation programme, government often borrow money to meet the challenge of executing the programme, thereby raising public deficit financing.

On the positive side, deficit financing might be beneficial to a nation in order to meet immediate financial challenges and contingencies. Sometimes, the imperativeness of deficit is as a result of the fact that government has to provide public goods which the private sector cannot provide because of huge capital requirement. Therefore, to step-up the pace of developmental programme, government might embark on deficit financing.

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Self-Assessment Exercise

List the effect of deficit financing on economic growth and development 3.7 Public Debt

3.7.1 Meaning of Public Debt?

In Public sector economics, public debt only refers to national debt. It is the total sum of money owes by a country both internally and externally. Some economists are of the opinion that public debt is how much a country owes to lenders outside of itself which can include individuals, businesses, and even other governments. The term "public debt" is often used interchangeably with the term sovereign debt. It is sometimes also referred to as government debt. It represents the total outstanding debt (bonds and other securities) of a country’s central government. Debt can be domestic or foreign debt. These are discussed below.

Self-Assessment Exercise Define public debt

3.7.2 Domestic debt or internal debt vs foreign or external debt

Domestic debt are those incurred within the domestic economy such as bond, banks and treasury securities. It is the part of the total government debt in a country that is owed to lenders within the country. On the other hand, foreign/external debt is money borrowed by a government, corporation or private household from another country's government or private lenders. It includes obligations to international organizations such as the World Bank, Asian Development Bank (ADB), and the International Monetary Fund (IMF). We can also have private debt, this is debt incurred by private individuals or firms for personal purpose. Similarities between private debt and personal debt are highlighted below:

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▪ A private individual or firm cannot borrow from itself, whereas government can borrow from itself, its own subjects and within the country.

▪ While a private economic unit can repay the debt either out of its earnings, accumulated assets or from other sources, the government is the creator of currency and can pay its debt straight-away by creating more of it. However, external debt can be discharged in this manner only if it is repayable in local currency.

▪ Public borrowings have a profound effect on various dimension of the economy -distribution, capital accumulation economic growth, income and employment stability, and so on. This way, public debt is both a source of problems and a tool of economy management in the hand of the authority. Private debt is only a problem to individual private person or firm that owes it.

Reasons for public debt are stated below:

➢ Government revenue is often not enough to offset expenditure. Or putting in another perspective, expenditure is always greater that revenue. In the developing countries the difference between revenue and expenditure is often negatively high.

➢ Incessant increase in annual budget.

➢ The need to “bail-out” in the event of global economic melt-down or severe downward trend of trade cycle.

➢ The need to provide critical infrastructure such as roads, railway and electricity.

➢ Future occurrence of unexpected disease epidemic like virus or cholera outbreak.

➢ There may be sudden increase in government expenditure. There may be wars, or natural calamities in which case the government would be forced to incur much larger expenditure and may run into a debt.

The effects of public debt in developing countries are usually severe and might threaten nation’s sovereignty. It can cause turmoil and dethronement of a government. It can even lead to bankrupt and unworthy of financial support. Apart from these, below are some

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major effects of public debt, especially, when they are large and increasing (like the case of Nigeria):

❖ The nation that keeps borrowing will eventually become bankrupt and unworthy of credit facilities.

❖ It can leads to policy reversals as donor nations or foreign creditors may refuse to grant loans.

❖ It opens domestic economy to external shocks.

❖ Inflow of foreign direct investment (FDI) or foreign private investment (FPI) stops.

❖ It subjects a nation to international dependency.

❖ Development programmes become difficult or almost impossible to attain.

❖ With all these, development plan, economic growth and development become unattainable.