If a government wishes to escape from the burden of the debt, then there are
two ways open to it. It may (i) repudiate its debt, (ii)
If the public authority decides to
repudiate the debt, then it loses the confidence of the people living in the
country and of the foreign governments. There is also every likelihood that in
case of foreign debt repudiation, the foreign states may take military action to
recover the loan or boycott the repudiating government. So in order to avoid
this degrading situation, every debtor country tries to own its obligation.
The main methods which are adopted to pay/reduce or wipe off the public debt
are as follows:
(i) Sinking Funds:
Sinking Fund is very
important method for the redemption of public debt. It is a fund which is
created out of the general revenue for paying off the loans every year. The
debtor country during the life of debt sets apart a portion of the current
revenue every year. When the sum thus accumulated becomes equal to the loan
raised, it pays off the entire debt in one installment.
If a debtor country wishes to repay a
permanent debt, it may do so by fixing installments over a period of years.
These installment repayments are known as annuities.
(iii) Utilization of Surplus Budget:
If during a particular year, the country
has surplus budget, it can be utilized in reducing the burden of the debt. It is
true that surpluses can be used for redeeming the public debt, but favorable
budgets are not common with the debtor countries. If at all there is any surplus any year, it is generally so small. It cannot make any
significant reduction in the national debt.
(iv) Redemption by
the Purchase of Government Stock:
A Government can also lessen
the burden of debt by the purchase of its own stocks in the market. These stocks
can be brought by fresh borrowing at low rates or by the utilization of surplus
Another very important method for
reducing the burden of the public debt is to convert a loan bearing a high rate
of interest into another with a lower rate of interest. Conversion
as stated by Dalton is not repayment, it is only the exchange of new debt for
old. If a state has contracted a loan when the rate of interest was high, it can
reduce the annual interest payment by conversion operation.
(vi) Capital Levy:
Another important method which has
been suggested by economists for wiping off the public debt is the institution
of a special debt redemption levy as is generally called. The advocates of
capital levy state that it is not possible to reduce the burden of war debt by
means of a sinking fund or surplus revenues or by annuities, etc. The state
should levy a special tax on a accumulated wealth or capital of the people at a
progressive rate and with the money thus raised pay off all the war debts.
Dalton in his book 'Public Finance' Writes:
"For just as during the war a law was
passed which every man of suitable age and physique was deemed to be a soldier,
so now in order to dissipate one of the evil legacies of War finance, a law
would be passed by which every man of suitable degree of wealth would be deemed
to die and to come to life again next morning as the fortunate heir of his own
property on payment of an appropriate ransom".
(vii) Surplus Balance of
A government can pay off debt by
increasing exports and reducing imports. The surplus balance can be used to
lessen the burden of debt.
(viii) Writing off loans:
The government can also request the credited countries
to write off loans.