Question

Explain the following method of redemption of Public Debt:

Sinking fund

Answer 1

Under this system, the government establishes a separate fund known as the 'Sinking Fund' for the repayment of the public debt. The government goes on crediting every year a fixed sum of money to this fund. By the time the debt matures, the fund accumulates enough amount to pay off debt.

Two ways of crediting a portion of revenue to this fund:

1. Firstly, it may credit a fixed percentage of its annual income to this fund. Secondly, the government may raise a new loan and credit the proceeds to the sinking fund.
2. According to DALTON, a sinking fund should be accumulated out of the current revenue of the government, not out of new loans.

The sinking fund is looked upon as a systematic method of debt redemption. The burden of the debt is spread evenly over a number of years. Further, this method increases the creditworthiness of the government. As against this, the sinking fund method is considered as a slow process of debt repayment.