What is Public Debt? | Types of public debt, Objective.

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Public debt definition in economics

Public debt or govt borrowing refers to the raising loans by the govt from its own people and in foreign countries by issuing bonds, certificates and securities. It is one of the important fiscal measures for mobilization of resources. We may called public debt as “Revenue of government”.

Objective and importance of public debt

The main objective and importance are given below

(i) For the maintenance of balance between expenditure and revenue: The most important aim of public debt raised by the govt. is to fill the gap between the revenue received by the govt. and proposed expenditure during the year. The govt may borrow money from internal or external sources as govt falls short of its expenditure. The govt. borrows money from internal and external sources in order to meet certain unforeseen calamities like flood, famines etc.

What is Public Debt? .

(ii) Fighting depression: Depression is a competition of falling price, slackness of productive activities and no hope for profitability in the economy. To eradicate the evils of depression, the public debt is the most indispensable tool of financial management and depression does not mean there is no money with the public. But the money remains unutilized due to the lack of the entrepreneurship. The govt may able to to lift the depressed economy to recovery which in turn leads to prosperity either by ensuring new money or by activating the idle resource by raising loans.

(iii) To curve inflation: It is a condition of raising price in the economy and it is a serious threat to the smooth and harmonious development of the economy. By raising debts, the govt can withdraw a large volume or amount of money from the public and check prices from the rising. The monetary policy alone is not much successful in curbing the inflation, fiscal policy of which public debt is the major fool has attained greater significance since first world war period. Hence, the best way to curb public spending is to borrow from the public.

(iv) Financing economic development: UDCs (Under developed countries) always face the problem of funds. Taxation capacity of such a nation is also very low. Moreover, taxation is resented if heavily imposed on the public. But to save the economy from the vicious circle of poverty the need of finance is necessary. The govt may borrow from the person within the country who are able to lead or from the resources outside the country and both are to finance in structure and creation of social over heads etc.

(v) To meet unprecedent expenses: Sometimes the govt raise loans to meet the unprecedent events like famines, flood, earth quakes and epidemics etc. The funds are raised by the govt as the govt is committed  to incur a much large expenditure. Again such cases of emergencies and calamities lead a sudden spurt in expenditure of the government.

(vi) To check the cyclical fluctuation: These cyclical fluctuation generally lead to many disastrous consequences. Therefore to control these cyclical fluctuation is one of the chief objective of the debt policy of the govt. By raising loans, the govt can finance the production activities when it tends towards recession. Thus preventing it from the evil of depression.

(vii) Unpopularity of taxation: Public is least interested in paying taxes to the govt. Any kind of tax is resented by the public whether old or new, they always oppose the enhancement of old rates of taxation as well as imposition of new taxes. At this critical juncture the govt adopts an easy process of resorting to public debt to save it's skin from the public opposition.

(viii) War finance: Modern age is an atomic age. In the age of atomic warfare, International tension is increasing day by day. A country needs a huge amount to maintain it's defence service and up to date equipment to protect from foreign aggression. So for this purpose govt borrow money.

(ix) Expansion of education and public health services: In modern times, govt are welfare govt who are responsible for expansion of education and health service with further improves the efficiency of people. For this purpose generally govt borrow money from internal and external resources in order to meet these requirements.

What is Public Debt? | Types of public debt, Objective.

(x) Creation of infrastructure: Generally public govt borrows from the creation of infrastructure in an economy. They include the development of railway, communication, dams etc. These type of investment are not much attractive for the private Businessman and fail to create social overhead gains from the society.

Types of Public Debt

(i) Internal and external public debt

(ii) Productive and Unproductive Public debt

(iii) Compulsory and Voluntary

(iv) Redeemable and Irredeemable

(v) Funded and Unfunded

(vi) Short and Long term.

Burden of public debt

The public debt burden refers to the sacrifices and consequences for the community through the increase in taxes at the time of payment and the payment of annual interest on the public debt.

Internal public debt and it's Burden

If the burden of public debt is defined in terms of loss of economic resources then internally held public debt does not impose any burden because the resources remain with in the same country. Here resources divert from one section to another section but it remains in the same society. Thus there is no money burden of internally held public debt.

If the burden is viewed in terms of reduction of income Inequality then internally held public debt close impose a burden on the society. This is because the bond holders are the rich person while the tax payers belong to both the rich and the poor people. In the Under developed countries (UDCs) the largest section of tax payers belong to poor section thus, the internally held public debt imposes a burden on the society. Here resource divert from the poor to rich people which the income inequality problem. This is called the real burden of the public debt.

External public debt and it's Burden

If the burden of public debt is defined in terms of loss of economic resource then externally held public debt does not impose burden because resource divert from one nation to another nation. Thus there is a money burden of externally held public debt.

If the burden is viewed in terms of reduction of income inequality then externally held public debt does impose a burden on the society. This is because the creditor countries are the rich nations while the tax payers of the debtor countries belong to both the rich and the poor people. In the under developed countries (UDCs) the largest section of the tax payers being to poor section. Thus the externally held public debt imposes a burden on the society. 

Here resources divert from the poor nation to rich nation which creates the income inequality problem. This is called the money burden of the public debt. Whether the external debt is harmful or beneficial to the debtor country is decided by the nature of utilization of the debt wrong utilization of the external debt will certainly creates harmfully effects on the debtor country.

Money burden and real burden

Money burden denotes the loss of consumption of goods and services by the people due to raise in taxes. In order to repay the loans, the govt. increases the tax rate which in turn reduce consumption of goods and services. On the other hand, real burden of the people denotes the transfer of purchasing power from poor section to rich section of the community. Govt. borrows from rich people of the society and in order to repay the loans govt. imposes taxes on the common people. 

As a result, purchasing power is transfer from poor to rich section. Hence, the real burden of public debt (disturbs income distribution of a society). According to Delton the burden of internal public debt is not much sufficient but burden of external public debt is closely associated with money and real burden. This is because the repayment of external debt reduce not only the consumption properties but also transfers the resources from poor to rich nations. Hence, it is very important to use the external public debt safety.

Redemption of public debt

Redemption of public debt means repayment (redemption) of a debt. Following are the methods which the govt. may use in discharging its payment obligation-

(i) Repudiation: Repudiation is nothing but denial of repayment obligation by the govt. Here the govt is simply refuses to pay interest and principal amount. But this is a good method of debt repayment (USA and USSR).

(ii) Refunding: This is a method use by the govt. to repay the debt through fresh loans. Under this method, the new loans raised at low rate of interest rates and are used to repay the old loans.

(iii) Sinking fund method: Under this method, a fund is created in the Central bank and the govt saves regularly so the accumulated amount in the fund is sufficient to repay the public debt. This fund is called as “Sinking fund”.

(iv) Capital levy (Collection): A capital levy is a “Once for all” special type of tax on capital assets for raising revenue to repay a public debt. This method is advocated particularly for the repayment of war debt.

(v) Year wise partial repayment: This is a method by which a part of debt is repaid every from the budget revenue. So that the total debt is paid off after some years.

(vi) Lottery method: Under this method the govt. does not repay all the debt obligations but select a particular debt via lottery method and repay the loans. But this method creates unnecessary and uncertainty in the mind of the loan given country.

(vii) Surplus Budget: Surplus budget means a public budget where the govt revenue is higher than the expenditure. The govt. may use the surplus amount to repay the debt amount.

(viii) Repayment of external debt: In order to repay the foreign debt or external debt the govt. needs foreign exchange. Earning of foreign exchange requires excess of exports over imports. So that the net earning are accumulated in the foreign exchange reserve. The govt uses this foreign exchange reserve to repay the external loans. For this reason it is very much essential to use the external loans in the most productive sector.

What is Public Debt? | Types of public debt, Objective.

Public debt in the developing country

Following are the main factors responsible for growing public debt in the developing and UDCs (Under developed Countries)-

(i) War and defense expenditure: Modern war is very expensive, In order to maintain a sound defense system the government has to maintain a large army of different types to buy costly war weapons etc. For this reason the govt. takes public borrowing.

(ii) Provision of social and economic overheads: In order to develop the modern socio-economic infrastructure the govt. adopts public borrowing programme. This is because the tax and other budgetary resources are not enough to build such facilities.

(iii) Creation of employment: In the developing countries public debt is used to mobilize resource for constructing public projects to open up large employment opportunities.

(iv) Import of technical know how and technology: To start with the development process, the developing countries have to import enough of materials and manpower which is possible only with external public debt. It should be noted here that the developing countries are still backward in respect of technological advancement.

(v) Import of food Grains: The UDCs (Under developed countries) are suffering from low agricultural productivity on the one hand and high pressure of population on the other hand. As a result, these countries are facing the problem of poverty and shortage of food grains. In order to import food grains the UDCs need debt finance.

(vii) To Gap the revenue: In order to maintain and perform different types of developmental works of the govt. need funds but the taxation and other type of budgetary revenue are very small to perform such big function. For this reason, the govt. take loans from different sources.

Sources of Public debt


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