Q.Describe the various methods of redemption of public debt.

Redemption of public debt = repaying the loans raised by the government. The important methods are: (1) refunding, (2) conversion, (3) sinking fund, (4) terminal annuities, (5) additional taxation, (6) surplus budget, (7) capital levy, and (8) surplus balance of payments. A sinking fund and terminal annuities are regarded as the most systematic methods. ## Meaning Public debt is the money borrowed by the government from internal and external sources. Redemption of public debt means its repayment — returning the borrowed sum to the creditors. Timely redemption maintains the government's creditworthiness and avoids the burden of perpetual debt. ## Methods of redemption 1. Refunding: the government issues new bonds and securities to repay the old (maturing) debt. The maturing debt is simply replaced by fresh debt, so the burden is postponed rather than really cleared. 2. Conversion: the government converts a high-interest (old) loan into a low-interest (new) loan. This reduces the burden of interest payments, though it does not reduce the principal. 3. Sinking fund: the government creates a separate fund into which it sets aside a fixed sum every year out of revenue; the fund, with accumulated interest, is used to repay the debt on maturity. It is considered the most systematic and honest method. 4. Terminal annuities: the government repays the debt in equal annual instalments (annuities). A part of the debt is cleared each year, so the entire debt is wiped out by the end of the period. 5. Additional taxation: the government levies new or higher taxes and uses the proceeds to repay the debt. It is a simple method but may burden taxpayers. 6. Surplus budget: when government revenue exceeds its expenditure, the budget surplus is used to pay off the debt. Surpluses are rare in modern times, so this method is of limited use. 7. Capital levy: a heavy, once-for-all tax on capital/property of the wealthy is imposed and the amount collected is used to clear a large debt (usually after a war). It is a drastic measure. 8. Surplus balance of payments: a favourable (surplus) balance of payments provides foreign exchange which can be used to repay external debt. ## Summary table | Method | How it works | |---|---| | Refunding | Old debt replaced with new bonds | | Conversion | High-interest loan changed to low-interest loan | | Sinking fund | Fixed sum saved yearly to repay on …