Question

California issued debt (general obligation bonds) to fund the state budget and must now repay what it borrowed. Given the facts above, please indicate if you think that California's debt is more likely to be internal or external. How do you know? Furthermore, is the repayment of state and local government debt likely to drain purchasing power from citizens in those areas?

Answer 1

Internal borrowing refers to general fund borrowings from other state special funds such as funds within which transport related revenues are deposited. External borrowing refer to general fund borrowings from investors by way of issuing notes warrants or bonds.

In this case California has issued general obligation bonds and hence this is an external debt.

Repayment of state and local government debt drains the purchasing power from citizens. The increase in public debt eats away a major part of the revenue earned by the government which leaves it with lesser amount to spend on the public welfare. By issuing bonds the government has reduce the disposable income of the public leaving it with lesser purchasing power.