2. Lecture outline What is public debt? Burden of public debt Public debt management Learning materials for the course

3. What is public debt? “Public debt is an obligation of a public debtor, including the national government, a political subdivision (or an agency of either), and autonomous public bodies” (adapted from International Debt Statistics 2015, World Bank, p. 168).

4. Question: What are other names of “public debt”?

5. Gross public debt Source: Jones, R. S. and K. Fukawa (2015), “Achieving Fiscal Consolidation while Promoting Social Cohesion in Japan”, OECD Economics Department Working Papers, No. 1262, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jrtpbs9fg0v-enhttp://dx.doi.org/10.1787/5jrtpbs9fg0v-en

6. Creation of public debt Often, the government attracts debt to finance its budget deficit This debt comes form internal and external sources Alternatively, it could print money!

7. Primary budget deficit Source: Jones, R. S. and K. Fukawa (2015), “Achieving Fiscal Consolidation while Promoting Social Cohesion in Japan”, OECD Economics Department Working Papers, No. 1262, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jrtpbs9fg0v-enhttp://dx.doi.org/10.1787/5jrtpbs9fg0v-en

8. Question: What might be the reason to attract public debt other than covering budget deficit?

9. Types of public debt Public debt can take various forms, but we can distinguish between two major types:  Internal (e.g. 92 percent in Japan)  External

10. Debt is different across different income group countries Traditionally, the developing countries have had the higher debt to GDP ratio compared to the developed countries But, things have changed as you can observe in the following figures

11. G7 Counties, External Debt-to-GDP Ratio, 2008–13

12. Key Debt Indicator Trends in Developing Countries, 2000–13

13. Deficits decrease national savings National savings= Private saving + Public saving or Low national savings decrease the ability of the government to repay the debt

14. Low savings in the US Tax cuts in 2001 by George.W.Bush Increased government expenditures for security after 2001 Tax cuts after 2008 to recover from deep recession

15. Burden of the public debt Public debt implies that the government should pay interest on it annually and out of its revenues: Where is public debt at the beginning of the year; is interest payments

16. What means government debt management? Government debt management is the process of managing risks and costs of attracting the debt in order to close the gap in the government finances The main objective of the public debt management is “to ensure that the government’s financing needs and its payment obligations are met at the lowest possible cost over the medium to long run, consistent with a prudent degree of risk.” (IMF and World Bank. 2001. Guidelines for Public Debt Management.)

17. Guidelines for Public Debt Management (IMF and WB, 20104) Scope of the Public debt management- «Debt management should encompass the main financial obligations over which the central government exercises control» (GPDM, 2014, p. 17) « there should be a separation of debt management policy and monetary policy objectives and accountabilities» (GPDM, 2014, p. 13)

18. Why is public debt management important? According to Greame Wheeler: Public debt portfolio is normally the largest portfolio in the country. It is associated with high risk to the government budget Debt servicing costs are high International credit rating agencies’ impact

19. Public debt management vs. public management Different goals of public management managers and fiscal policy professionals: Regarding expected cost and risk Monetary policy instruments Exchange rate policy

20. Useful websites

21. Core literature to consult Graeme Wheeler, 2004, Sound Practice in Government Debt Management, World Bank World Bank, 2014, Guidelines for Public Debt Management B.I. Alekhin, 2007, “Public Debt Management”, Unity-Dana, Moscow Jones, R. S. and K. Fukawa (2015), “Achieving Fiscal Consolidation while Promoting Social Cohesion in Japan”, OECD Economics Department Working Papers, No. 1262, OECD Publishing, Paris. http://dx.doi.org/10.1787/5jrtpbs9fg0v-en