Public sector borrowing requirement (psbr), Managerial Economics


Public Sector Borrowing Requirement (PSBR) is the amount which the government needs to borrow in any one year to finance an excess expenditure over income.

Effects of Government Borrowing on the Economy

If the government borrows from the general public, this may divert funds from more productive uses.

Firms also require finance and it may be that individuals and financial institutions prefer to lend to the government where the risk is less and possibly the returns are greater.  Thus the public sector may "crowd out" the private sector.   This is known as the "crowding out" effect.

A further harmful effect may occur.  Government borrowing will tend to raise the rate of interest.  This increase in interest rates will make certain capital investments less profitable resulting in a fall in investment, slower economic growth and a reduction in the competitiveness of he industries.

The increase in interest rates will also raise the cost of borrowing money for the purchase of houses and other goods hence an increase in the cost of living leading to inflationary wage pressure.

To avoid the above adverse effects, the government would borrow from the banking system the use of Treasury Bills; But this would raise eligible reserve assets in the banking system and thereby the money supply and the resultant inflation:  This puts the government in a dilemma.

The above pattern could be alleviated if the size of the PSBR was reduced.  This could be done by:

Reducing government expenditures and/or increasing taxation:  The first option is the trend in recent years but increased taxation is said to have the effect of reducing initiative and incentives.

Of late, employment has been put in the control of PSBR and ensuring that the growth of money did not exceed the growth of output.

Posted Date: 11/30/2012 4:28:49 AM | Location : United States

Related Discussions:- Public sector borrowing requirement (psbr), Assignment Help, Ask Question on Public sector borrowing requirement (psbr), Get Answer, Expert's Help, Public sector borrowing requirement (psbr) Discussions

Write discussion on Public sector borrowing requirement (psbr)
Your posts are moderated
Related Questions
Cheap Labour   It is often argued that the economy must be protected from imports which are produced with cheap, or 'sweated", labour.  Some people argue that buying foreign

Profit maximiZation is theoretically the most sound but practically unattainable objective of business finns. Do you agree this statement? If agree give

A firm hires two risk-neutral workers to assemble bicycles and pays $20 for each assembly.Charlie's marginal cost of allocating effort (measured in dollars) to the production proce

Types of Price Elasticity of demand   a)     Perfectly inelastic demand Demand is said to be perfectly inelastic if changes in price have no the quantity demanded so

Q. What do you mean by Cost Function? Cost function is a derived function. It's derived from the production function that describes the efficient method of production at any gi

Disadvantages of Mixed Economy Large monopolies can still exist in the private sector, and so competition does not really take place There is likely to be a lot of bureaucr

Determine the concept of Law of demand We have considered numerous factors which fashion the demand for a commodity. As explained the first and most important factor which determ

External Debt Problem External debt refers to debt owing by one country to another.  External debt is a more serious problem than internal debt because the payment of interest

DIRECT TAXES A direct tax is one where the impact and incidence of the Tax is on the same person e.g. Income Tax, death or estate duty, corporation taxes and capital gains

The Social Cost of Unemployment i.      For the individual, there is the demoralizing effect which can be devastating particularly when they are old.  This is because as some