Annotation. The Pandemic time of Covid19 shows the dramatic increase on borrowing. Our research describes the essence of the state debt and its purpose. When the state borrows money, it promises you to pay. To make this payment (payments), the state increases the bargain (if required) to pay this debt along with many other current payments. The economic effect in this regard is due to the fact that the tax payer perceives the future taxes. The measurement of the perception is difficult and neither the economists nor the other professors are able to form a precise and realized perfection formula.

Our analysis is a decisive factor in the time and level of consciousness of the population on this issue (the threat) and what it is to determine the effect of financial borrowing on bond loans.

This hypothesis is known as the Ricardian equivalent (Ricardian equivalent of the famous economist David Ricardo). Ricardo first considered this issue in his work.

We have a hypothesis that the population does not recognize the introduction of new taxes or the increase of existing ones, despite the current deficit in reality. In this situation, if the initial stage of the payout is partially replaced by the state loan, it will create a sense of the current life and improvement of the population's income. This hypothesis is accompanied by a rational decision - community members begin to spend more money. However, the final result will be that the state taxpayer must be tied to the amount that the state will fully lend to the existing debt, with interest accrued on it. There will be an unexpected effect here: since the society does not expect the increase of the bargain, each member will have to cut costs even when the payoff is paid.

The theoretical aspect and practical scenario discussed by us gives us the following conclusion: A deficit is needed when the economy is in place with an economic downturn and economic crisis. This view is based on the fact that the resource received by the government securities emissions will cover the reduced budget and, at the same time, the reduction of the rate of pay, which will ease the economic condition of the wider population of the population.

Keywords: Covid19, state debt, ricardo equivalent, incomplete equivalent, budget deficit, population perception 

Pandemic time due to Covid 19 and ongoing economic crisis stimulated Governments to increase its borrowing. We have studied International policy, regarding Public debt and its use. Public debt is one of the macroeconomic parameters, objects and instruments of the state economic policy. Existence of public debt can have both positive and negative impacts on the real, financial and other sectors. The positive impact of debt is manifested in the provision of financial resources to the government and in stimulating economic growth, while the negative effect is the transmission of liabilities to future generations. In this regard, public debt management is the development and implementation of a strategy aimed at attracting the necessary amount of financing, achieving the desired debt parameters, such as risk, cost of services and other goals, in particular, creating an effective internal debt market.

Public debt[1]  is an unsecured obligation of the government. In order to obtain a loan from the company, the state issues a debt obligation. When a state takes out a loan it promises to repay the debt to the creditors and attracts them on the terms of the loan which indicate the principal amount of the loan, the interest rate that will accrue on the principal amount and the period of time when the interest and principal will be repaid. Thus, government debt is the sum of all government debt securities issued by the government that has not yet been settled.

As a result of our research from international experience, we have come to the conclusion that the state issues several types of debt securities, which can be classified into different categories[2].

       One category may include one similar type of issuing state body - the central government, local self-government or a separate ministry. It is permissible to divide these categories into subcategories - for example, local government securities can be debt securities issued by a district, town or city.

The second approach is to rank government securities according to their maturity. When we talk about a ten-year or thirty-year government bond, it means that the time frame from the issue of government securities to maturity is the subject of consideration.

In international practice there is a more accepted and widespread division. For example, US federal government debt is divided into three broad categories according to their maturity[3]:

• Treasury bond is a government security with a term of up to one year (it can be three-month, six-month, one-year, etc.);

• The term of the treasury bill varies from one to ten years;

• The initial maturity of the treasury bond should not be less than ten years.

An accepted and widely used name for securities issued by the state and local governments is bond, which is not directly related to their maturity.

      The name of a perpetual bond is perpetuity. In such a case, the bond does not have a repayment period, i.e. it always accrues interest, although there is no principal amount to be repaid. Such perpetual bonds were once issued by the British government and are called consoles.

The third classification approach sorts government securities by the source responsible for repaying them.

• In international practice we have "General obligation bonds" (General obligation bonds), which are paid with the income from public taxation;

• Revenue bonds - A source of payment is a tax that will be levied on a specific category of customer, such as a bridge or tunnel construction tax on a passing vehicle. This approach is used only in the ranking of government and local debt securities.

The size of public debt is a subject of special interest in the world community. Joint government debt is the sum of government securities issued individually by all types of government agencies. This figure is often published in the media, seen during various televised or political debates, although simply the total figure is not polytheistic unless it is specified.

The specification primarily refers to inflation. Nominal value of the bond is the amount that will be paid to repay the bond. This amount is known to the bond buyer from the beginning. However, the fair value of a bond is the sum of the items of goods and services that can be purchased under that bond in a given period. The nominal value of the bond is unchanged and it does not change in the wake of changes in the inflation rate, although its daily fair value changes.

Thus, a member of the public who owns government securities is interested in its real rather than nominal purchasing power.

The second important clarification concerns the change in the interest rate. The price of a bond in circulation fluctuates in the wake of changes in interest rates in the market. The market price of a bond reacts instantly to a change in the interest rate and the face value of the bond is quite different from the market price of the bond[4].

To illustrate this, imagine that we purchased a GEL 5,000 one-year treasury bond (i.e. we borrowed GEL 5,000 from the state) on the first day. The bond accrues 10 percent annual interest, which is expressed as a percentage of the interest at the end of each year of GEL 500. Within a few days of acquisition, the National Bank of Georgia makes a decision that will result in a subsequent promissory note lowering the yield on your new bond to a 9 percent annual interest rate. That means your bond enjoys more privilege because it still brings you 10 percent annual yield, instead of the new promising 9 percent yield bonds. This gives us a logical and rational opportunity to sell our existing bond for more than 5,000 GEL. The reason for this is the interest rate, because the new bond brings only an annual interest of GEL 450, instead of the GEL 500 we have from the income-generating asset.

In this regard, the revaluation of previously issued bonds in the light of market realities leads to an increase or decrease in the price of this debt instrument, depending on the specific financial situation. If the interest rate falls on the bond, it means that the price of the existing (previous issue) high interest income generating bond increases, and if the opposite happens, then the price of the previously issued bonds falls. In this respect, the difference between the market and the face value is reflected in the magnitude of the interest rate. Our analysis shows that, unfortunately, complete information on securities issued by most countries is not available to a wide range of investors in a timely manner, as international practice shows that most countries do not disclose this information and it is not adequately reflected in financial and economic journals.[5].

More important than the size of public debt is the effect that public debt has on the economy of a country. There is no consensus among economists on the outcome of this effect. When the state borrows money, it promises to pay you back. To secure this payment (s), the state raises the tax (if it needs to) to pay this debt along with many other current payments. The economic effect in this regard is largely due to how the taxpayer perceives this future tax. Measuring this perception together is difficult and neither economists nor any other profession can create an accurate and real taxable perception formula.

To evaluate this event, we have considered a virtual example. Suppose the state acquires 100 billion annually. GEL goods and services. Payment is made by collecting a tax paid by households on the territory of Georgia. With the money received, the state acquires goods and services. Equality is in the face - revenue equals expenditures and the state budget is balanced. Now imagine that the state decided to change the method of financing the existing expenditures, although it left the total amount of expenditures unchanged.

For our study, let's assume that in the first year, the state is cutting taxes by 10 billion. In the amount of GEL and the reduced part of the income fills 10 billion. By issuing GEL government bonds with an interest rate equal to 10 percent and a maturity of 1 year.

Next year, the bond is repaid and the state is obliged to pay 10 billion. GEL base amount, to which is added 1 billion. GEL interest amount. The first year tax is usually at the level of 10 billion. GEL less, but in the second year the tax is 11 billion. GEL more. The main issue in this regard is what effect this temporary shift of the tax has on the population. In the first year the population is richer because it has to pay less tax. However, in the second year the population has 11 billion. Paying the tax increased by GEL, which is equal to the amount purchased by the population and received back as interest. That is, the state receives the amount in the form of a loan, for the visit of which it increases the tax. This approach is fair for any bond with any maturity, be it 1 year, 10 years or perpetual perpetuity.

According to our analysis, the decisive factor is the time and the level of awareness of the population on this issue (threat), what it is about and to determine the effect of financing the economy with bond loans.

If every member of the public realizes that the future tax will deduct the principal amount of the loan and the interest accrued on it, then the interest rate on the bond will be equal to the tax rate. In such a situation the state debt will no longer have any effect and influence. This hypothesis is known as the Ricardian equivalence by the famous economist David Ricardo[6]. Ricardo was the first to discuss this issue in his paper[7].

If society does not anticipate all future taxes arising from government debt, then they will feel richer when debt is issued and feel poorer in the future when suddenly they have to pay increased taxes to finance government bond principal and accrued interest taxes[8].

In this regard, according to our analysis, the expectations of the population are the most important. Unfortunately, as our research and international discussion on this issue testifies, there is no credible way to determine people’s expectations for future taxes. Thus, a number of international researchers have used another method to determine the effect of public debt on the economy.

According to our analysis, research on this issue has been going on since the fifties of the twentieth century and it has been going on for several decades, although a consensus among economists has not been reached to date. In principle, it is possible to measure the effect of debt on economic activity, although it is quite difficult to reflect this attitude in practice. In general, economists support the equation of David Ricardo. If the public debt is equivalent to the amount of tax, in this case the so-called. Discussion of the "deficit problem" by the public in most cases is meaningless.

The notion of complete equivalence implies that the state budget deficit only changes the amount of tax at that time and to the extent that each member of society has the opportunity to anticipate this event and compensate for the positions. If this happens, no significant economic changes and consequences will occur[9]. Under conditions of incomplete equivalence[10], deficits have an impact on the economy, although the consequences are difficult to predict.

Our hypothesis is that the population does not recognize the introduction of a new tax or the increase of the existing one in spite of the current deficit in reality. This hypothesis is accompanied by a rational decision - members of the community begin to spend more money. However, the end result will be that the state tax will have to be levied to the extent that the state will pay off the existing debt in full, with interest accrued on it. There will be a surprise effect here: because the tax increase was not expected by the public, each member will have to cut costs regardless of when the tax is paid.

The conclusion that can be drawn from these factors is as follows: Deficit or surplus influences decisions not only in the period when this imbalance occurs, but also in the subsequent period, which is the effect of expectations. It is quite difficult to predict the magnitude and duration of the effect of this event.

This analysis leads to the conclusion of when it is necessary and in what way to use this event to correct various conditions of the economy. Our view may be presented in a different way - how the deficit can be purposefully used to improve the economic situation. The source of filling the government deficit is the issuance of government securities.

If there is a complete Ricardian equation, ie the deficit and the amount of tax are equal to each other, any hypothesis makes no sense, as this situation precludes the need for long-term and influential public debt.

The subject of our paper is Ricardo's state of incomplete equivalence[11], which has a direct and significant impact on economic processes and the standard of living of people. The main result of this disproportion is the state budget deficit. The theoretical aspect and practical scenario we have discussed allow us to draw the following conclusion - deficit is necessary when there is an economic downturn and economic crisis in the economy. This view is based on the idea that the resource issued by government securities will cover the reduced tax during the economic downturn. In addition, it is possible to reduce the tax rate, which will alleviate the economic situation of the general population.

In our opinion, this approach has another additional positive effect - it will create a situation when the general public will feel richer and start spending more. The goal of increasing spending in the economy is to recover from economic activity, business revival and the economic crisis. This situation is accompanied by problems, which we can call "side effects". One of the problems lies in the fact that the above seemingly positive effect is based solely on the fact that society and each of its members do not perceive future tax increases to cover the current deficit (i.e. the issuance of government securities)[12].

Consequently, the impact of the deficit on the economy is felt when society feels (and in reality errs in that sense) that it has become more affluent.

To the hypothesis proposed by us, which we have elaborated in detail in the paper and given the relevant argumentation, a new logical chain is added: public debt, deficit issues, economic recovery - these are macroeconomic and political issues.

Consequently, influencing these issues and misleading the public (correcting the current situation and paying increased taxes in return for it in the future) often becomes the basis for political speculation and changes in political currents. A good example of this in the world is the economic policy pursued by US President Ronald Reagan, during which the US public debt increased sharply, but from 1980 to 1988 the population felt more luxury and less tax (government debt was long-term). A similar phenomenon occurred in 2007-2012, when US public debt increased by an average of $ 1 trillion annually and stands at $ 21 trillion. Due to Pandemic and Covid 19 economic consequences, this fugure already reached $ 26trillion [13].

Rising public debt and tax cuts have lifted the US economy out of crisis in 2007-2012 and helped a lot during the Covid 19, but in the near future the US population will have to face the downside of the process - in the wake of the economic downturn, taxes will increase, which will have a sudden effect (Ricardo's incomplete equivalence) on prosperity.

In our analysis, which is based on the position of a number of international researchers, incomplete equivalence leads to changes in the structure and interest rate of an unsecured loan in the same direction. For example, during a recession, there is an increase in interest rates in the economy. This in turn reduces investment and economic growth. The result is a reduction in the overall level of production. In such a situation, the policy of government bonds and government should be a combination of steps in this direction - to reduce interest rates, increase the issuance of government securities and change the trend of economic recession in the economy towards economic growth through government investment. That is, the deficit is used to stimulate the economy in the current crisis reality in order to improve production rates and stop the decline, although the payment for this is made in the form of increased tax during the boom period.

It is a matter of debate that needs to be clarified and substantiated as to whether this relationship is a valuable and equitable exchange in the economy.

In our paper, all the hypotheses presented here are discussed, their confirmation is carried out and the relevant conclusions are drawn. 

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