CA Foundation · Business Economics · Public Finance
Which of the following is a correct statement about financing public expenditure through internal public debt?
Internal public debt is borrowing from individuals, banks and institutions within the country, so repayments and interest flow to domestic residents and mostly transfer resources within the economy. Borrowing from foreigners is external debt, and debt, unlike tax, creates a repayment obligation.
- AIt involves borrowing from foreign governments and institutions, creating a claim on foreign resources
- BIt is borrowing from citizens and institutions within the country, so repayment transfers resources within the economyCorrect
- CIt never imposes any burden on future generations under any circumstances
- DIt is the same as raising revenue through taxation
Explanation
Internal debt is raised within the country, for example through government securities bought by banks and individuals. Interest and principal are paid to domestic residents, so it is largely a transfer within the economy. Foreign borrowing is external debt, and debt differs from tax as it must be repaid with interest.
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