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Difficulty: MediumPublic Debt Types and Management

When a government borrows funds to construct revenue-yielding assets, such as a toll highway or a hydroelectric power plant that generates income to pay back the loan, which category of public debt does this represent?

  1. Productive debtAnswer
  2. B
    Deadweight debt
  3. C
    Unfunded debt
  4. D
    External debt

Answer

Productive debt is debt incurred to fund capital expenditure projects that generate revenue to cover the loan's repayment.
Productive (or reproductive) debt refers to government borrowing used for capital investments that create income-generating assets. The revenue derived from the project is utilized to service and repay the loan without creating a net financial burden on taxpayers.

Step-by-Step Solution

1
Analyze the purpose of the borrowing in the scenario.
The government is borrowing for a toll highway/hydroelectric power plant that yields revenue.
Public debt is classified primarily by its purpose, economic productivity, maturity, or place of issuance.
2
Distinguish between productive and non-productive debt categories.
Debt backed by self-liquidating, revenue-earning assets is classified as productive (reproductive) debt.
The returns from the investment cover both the interest payments and principal redemption over time.

Key Concept

Classification of Public Debt by Productivity
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Topics

Public Debt Types and Management

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