Question

Mention any three methods of redemption of public debt.

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’a high interest public debt is converted into a 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.