Question

Explain the methods of debt redemption.

Answer 1

Methods of Redemption of Public Debt:
The process of repaying a public debt is called redemption. The Government sells securities to the public and at the time of maturity, the person who holds the security surrenders it to the Government. The following methods are adopted for debt redemption.

(1) Sinking Fund:

• Under this method, the Government establishes a separate fund known as the “Sinking Fund”.
• The Government credits every year a fixed amount of money to this fund.
• By the time the debt matures, the fund accumulates enough amount to pay off the principal along with interest.
• This method was first introduced in England by Walpole.

(2) Conversion:

• 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, high-interest public debt is converted into low-interest public debt.
• Dalton felt that debt conversion actually relaxes the debt burden.

(3) Budgetary Surplus:

• When the Government presents a surplus budget, it can be utilized for repaying the debt.
• A surplus occurs when public revenue exceeds the public expenditure.
• However, this method is rarely possible.

(4) Terminal Annuity:

• In this method, Government pays off the public debt on the basis of terminal annuity in equal annual installments.
• This is the easiest way of paying off the public debt.

(5) Repudiation:

• It is the easiest way for the Government to get rid of the burden of payment of a loan.
• In such cases, the Government does not recognize its obligation to repay the loan.
• It is certainly not paying off a loan but destroying it.
• However, in normal case the Government does not do so; if done it will lose its credibility, (vz) Reduction in Rate of Interest:
• Another method of debt redemption is the compulsory reduction in the rate of interest, during the time of financial crisis.

(6) Capital Levy:

• When the Government imposes a levy on the capital assets owned by an individual or any. institution, it is called a capital levy.
• This levy is imposed on capital assets above a minimum limit on a progressive scale.
• The fund so collected can be used by the Government for paying off wartime debt obligations.
• This is the most controversial method of debt repayment.