UNIT 13 THEORY OF PUBLIC DEBT

Structure
13.0 Objectives
13.1 Introduction
13.2 Comparison between Private and Public Debt
13.3 Views Regarding Public Debt
13.4 The Burden of Public Debt
13.5 Debt Burden and Future Generation
13.5.1 Richardo – Pigou Thesis
13.5.2 Buchanan Thesis
13.5.3 Musgrave Thesis

13.6 Let Us Sum Up

13.7 Key words
13.8 Some Useful Books
13.9 Answer or Hints to Check Your Progress
13.10 Exercises

13.0 OBJECTIVES
After going through this unit, you will be able to:
z know the meaning of public debt;
z compare private and public debt;
z understand different views regarding public debt;
z able to know whether public debt imposes any burden on the community
concerned; and
z know that how the debt burden effects future generation.

13.1 INTRODUCTION
Expenditures of the government have increased rapidly during recent decades despite
role of state in economic activities decreasing considerably. However there are limits
to which revenues from taxes can be raised to meet continuous increasing
expenditures. Government needs to borrow when current revenue receipts fall short
of public expenditure. Governments usually borrows by issuing securities such as
government bonds and bills. As mentioned in Encyclopedia Britannica, public debt
refers to “Obligations of governments, particularly those evidenced by
securities to pay certain sums to the holders at some future date.”
P E Taylor has defined public debt as “ Government debt arises out of borrowing
by the treasury from banks,business organisations and individuals.The debt
is in the form of promises by the treasury to pay the holders of these promises 1
Public Debt aprincipal sum and in most instances interest on the principal. Borrowing is
resorted to in order to provide funds for financing a current deficit.”
The borrowing of the government may be from within the country or from outside
the country or both. Public debt can be categorised as internal debt, owed to
lenders within the country, and external debt owed to foreign lenders. Another
common division of government debt is by duration.Short term debt is generally
considered to be one year or less, long term is more than ten years. Medium term
debt falls in the middle.
Public debt or public borrowing is an instrument of fiscal policy. The purpose of
borrowing may not always be for obtaining revenue resources only. It may be for
influencing aggregate demand, i.e. to influence the investment and consumption
expenditures for maintaining stability in the economy. Modern wars and growth of
defense expenditure have also led to increase in public expenditure and therefore
increase in public debt.
The Government of India’s total debt obligations were only Rs.2865.4 crore in
March 1951 but shot to Rs.15,61,876 crore in March 2003 and were budgeted to
reach Rs.17,80,064 Crore in March 2004. It is noteworthy that as a proportion of
country’s GDP, GOI’s debt liabilities were less than 3% in March 1951 but shot up
to around two thirds in March 2004.

13.2 COMPARISON BETWEEN PRIVATE AND

PUBLIC DEBT
In certain respect s government borrowings resemble the private ones. Like a private
borrower the government may also borrow either for consumption or for investment
purposes. It will also be paying interest in such borrowings, but the dissimilarities
between the two are more glaring
1) A private economic unit can not borrow internally that is to say; it can not
borrow from itself. However the government usually borrows internally, that is
from its own subjects and from within the country.
2) While a private economic unit can repay the debt either out of its earnings or
out of its accumulated assets or by borrowing from other sources (thus
substituting one debt for the other), such need not be the case with the
government. The government is the creator of currency and can pay its debt
straight –away by creating more of it. The fact that it does not do so only
reflects its concern for the welfare and stability of the economy and not the lack
of power to do so. However, external debt can be discharged in this manner
only if it is repayable in local currency. But creation of domestic currency can
not be the means of repaying if the foreign debt is repayable in foreign currency
or gold. In that case, foreign currency will have to be procured through export
earnings or through some other means failing which gold will have to be paid
out.
3) Public borrowings have a profound effect on various dimensions of the economy-
distribution, capital accumulation, economic growth, and income and
employment stability and so on. This way public debt is both a source of
problems and a tool of economic management in the hands of authorities.
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Check Your Progress 1 Theory of Public Debt

1) What is the public debt?

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2) Why the need of public debt arises?
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3) What are the main differences between public and private debt?
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13.3 VIEWS REGARDING PUBLIC DEBT

Academic views regarding the burden of public debt have been changing according
to the changes in general economic thinking about state intervention.
In the Eighteenth century, public debt was favoured by economists as they had
great faith in the role of state in economic activities. Their favourable attitude towards
public debt was a part of mercantilist doctrine.
But in the Nineteenth Century and the early part of the Twentieth Century public
debt was condemned by early classical economists mainly because of their lack
of faith in the role of state in economic activities.
David Hume, Adam Smith and David Ricardo had identical views about the
consequences of public debt. Their opposition to public debt was on the ground
that public expenditure is wasteful and unproductive.
David Hume opposed public debt and said that, “nations once they began to borrow,
would be unable to resist, until they reached the point of bankruptcy.”
Adam Smith thought that, once the sovereign started to borrow, his political power
was increased because he was no longer dependent on tax exactions from his subjects.
Therefore, borrowing encouraged the sovereign to wage needless wars. On the
other hand, if taxes were raised to meet current costs, war would in general be more
speedily concluded and less wantonly undertaken. In short, the ability to engage in
loan finance makes for irresponsibility in sovereign.”
Ricardo characterized national debt as ‘…one of the most terrible scourges, which
was ever invented to afflict a nation.
However, subsequent thinkers like Malthus, Mill, Sidgwick and Cairnes had some
liberal view about the consequence of public debt. As Malthus said that, “The
material debt is not evil which is generally supposed to be. Those who live on the 3
Public Debt interest from the national debt, like statesmen, soldiers and sailors……….contribute
powerfully to distribution and demand…. They ensure that effective consumption
which to necessary to give the proper stimulus to production……… therefore, the
debt, once created, is not a great evil”.
The modern theory of public debt is an offset of the economics of depression or
the Keynesian economics. The economic anomaly created by the Great Depression
of the 1930s gave way to the development of the new theory of public debt.
The classical theory of public debt assumed full employment and unproductiveness
of public expenditure and the classical antagonism towards public borrowing was
based on these assumptions. But S E Harris observes that once the economists
allowed for unemployment, assumed elasticity in monetary supplies and agreed that
that Government expenditures could be productive and need not necessarily be
wasteful, the case of public borrowing was strengthened. “Prof. AH Hansen the
exponent of modern fiscal theory said that public debt is an essential means of
increasing employment and has become an instrument of economic policy today.
Thus the modern theory of public debt is concerned with macro economic variables
and not with individual utilities. It assumes the whole economy as a unit. Modern
economists believe that internally held public debt involves no burden since we owe
it to ourselves.
According to them external debt is regarded as definite burden as since repayment
of principal and interest to foreign countries are entailed, such repayments involves
a transfer of real goods and services from the debtor to the creditor country in
payment of interest and principal amount.
Check Your Progress 2
1) Why did classical economists oppose public debt?
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2) What is modern view regarding public debt?
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3) Why modern economists favour public debt?
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13.4 THE BURDEN OF PUBLIC DEBT

We shall devote this part of the unit to a discussion of the much controversial issue,
4
namely, whether public debt imposes any burden on the community concerned or
any portion there of, and also whether the burden, if any, of the public debt can be Theory of Public Debt
shifted to a subsequent generation, the burden of public debt public debt refers to
the sacrifice it will impose and have effects on the community through a rise in taxation,
necessitated at the time of repayment and for paying the annual interests on the
government loans.
A distinction is made between financial burden or primary burden and real burden
or secondary burden. When a debt is incurred by the government, the level of taxation
in the economy has to be increased in order to meet the interest charges as long as
the debt continues to exist. To the extent of the increase in tax level, the income of
the people is transferred to the government. The consequent loss in the income of
the people may be called financial burden of public debt.
The higher level of taxation caused by the rising public debt may have some
repercussions on the economy in the form of adverse effects on the capacity and
willingness to work and on the capacity and willingness to save. These effects may
be called real burden or secondary burden of public debt.
There are various ways of estimating the burden of public debts. However, not only
one method but the combination of various methods should be adopted. The relevant
factors which should, therefore, be taken into account is considering as to whether
an internally held public debt imposes a burden, and if so how much, are set forth
below:
1) The nature of burden of an internally held public debt is different from that an
externally held public debt. In the case of an externally held public debt the
interest and the principal are required to be paid by the debtor countries to the
creditor countries by means of export surplus and, as such, by the transfer of
real resources from the debtor countries to the creditor countries, In the case
of an internally held public debt, on the other hand, the resources remain within
the country but only require to be transferred from the taxpayers to the
bondholders in the from of interest payment to the latter.
2) If the burden of an internally held public debt is measured by the amount of
interest transfer to be made annually from the tax payers to the bondholders,
then it follows that the burden is not measured by the absolute amount of the
public debt but by the rate of interest stipulated on the bonds. Thus the burden
of a given amount of public debt is with, say, a 2% interest rate is half the
burden of the same amount of debt with a 4% interest rate, since in the former
case the required money transfer from the tax payers to the bondholders by the
state is half that in the latter case.
3) If the burden of public debt consists in the raising of taxes for paying interest to
the bondholders, then the burden is measured by the amount of the strains
and frictions which are imposed on the economy as a result of the tax raising
and interest payment programmes and the ultimate limit of the size of the public
debt is determined by the strains and frictions which can be imposed upon the
community in this manner, the bonds are held predominantly by the richer section
and the tax is raised from the poorer people, them these strains and frictions
will be greater than if the bonds are held by the poorer people and the taxes are
imposed on the richer
4) Prof. Domar holds that the burden of public debt should be defined as the ratio
of total debt to the total national income i.e. total debt /total national income. If
the total amount of national income remains constant and the total amount of
5
public debt increases year after year, the burden of the debt would increase.
Public Debt But if the national income also rises, say, by a constant amount, then in spite of
the increase in the volume of public debt, the burden of public debt, defined as
the total amount of public debt divided by the total amount of national income,
will actually fall, This will be more so if the national income rises by a constant
relative amount along with the rise in the amount of public debt, in other words,
as the national income rises the total amount of tax collected by the state rises
automatically, and thus larger and larger amounts of public debt may actually
impose lesser and lesser amount of burden.
5) The Domar argument that the burden of public debt (defined as the ratio of
public debt to national income) may be reduced even with an increase in the
absolute volume of public debt can e shown by means of the following simple
example. Let us conceive of three cases, namely, case I where national income
remains constant over years; cases II where national income increases over
years; and case III where national income rises at a faster rate than in case II.
Suppose also that in all the cases 20% of national income is debt financed and
that a given amount of national income obtained by deficit financing in a particular
year lasts for that year only and hence to generate the same amount of income
during the next year an additional amount of deficit financing and hence public
debt creation will be necessary.
Case I (when national income is constant at, say, Rs. 500).

Year I Year II Year III At the end of the

third year

Public debt
=
100 100 100 300
(> 1
2 )
National income 500 500 500 500

Case II (when national income increases by, Rs. 100 per annum).

Year I Year II Year III At the end of the

third year

Public debt
=
100 120 140 360
(= 12 Approx )
National income 500 600 700 700

Case III (when national income increases by, Rs. 200 per annum).

Year I Year II Year III At the end of the

third year

Public debt
=
100 140 180 420
(< 12 )
National income 500 700 900 900
From the above table it appears that though the absolute amount of the debt increases
from case I to case II to case III from Rs.420 each at the end of the third year, the
burden of debt (defined as the ratio of public debt to national income) decreases
from greater than half to half and to less than half in the cases in that order. Domar
6 has further shown that if the national income increases by a constant relative rate the
ratio will after sometime become constant and will not vary at al whatever be the Theory of Public Debt
volume of the debt (and national income).
6) Dr. Lerner is of the opinion that when unemployment is fought by deficit spending
and as such the amount of public debt increases, the so called burden of the
debt should be weighed against the burden of unemployment which would be
there if the deficit spending programme had not been undertaken. And if this is
done, the burden of the debt may appear to be much smaller and even nil or
negative.
7) A large amount of public debt requires a correspondingly large amount of tax
collection and this may adversely affect work incentives saving and risk taking
propensities, which under certain circumstances, may mean a worse allocation
of economic resources.
8) It is sometimes held that a large amount of public debt increases the inequality
of income distribution in favour of the bondholders since the bondholders are
generally the richer people whereas there is definite limit up to which taxes may
be made progressive without serious detrimental effect on work incentives etc.
this point of view has, however, been contested by Dr. Lerner who holds that
it is because of the inequality of income distribution that public debt is held by
the richer section in large quantities. In other words, the inequality of income
distribution is the cause, not the effect, of the concentration of public debt in the
hands of the richer few.

13.5 DEBT BURDEN AND FUTURE GENERATION

Another question which has given rise to a great deal of controversy in recent years
is whether the system of financing a project by means of public debt shifts the burden
to the future generation. The questions involved here are whether debt financing
necessarily imposes a burden or a sacrifice upon the future generations? How does
such a burden transfer come about and what is its bearing on fiscal equity? The
theory of shifting of burden has thus been revived in new forms discussed below.

13.5.1 Ricardo – Pigou Thesis

According to it, if the government expense is financed by taxation, the first generation
hands on to the second nothing but tax receipts; if by bond issue, the first generation
bequeaths the bonds to the second generation, but along with them, a tax liability
represented by the annual charge on the debt for interest, and if the bonds are not
perpetuities, for redemption or amortisation. The welfare of the second generation,
however, depends not on whether it inherits tax receipt or government bonds, but
on what it inherits in the way of real stock of capital; and this latter inheritance
depends on the reaction of the first generation to the taking away of real resources
by the government. The first generation is likely to cut its consumption more and
investment less, if it receives only tax receipts from the government, than if it receives
bonds, because it fails to give full weight to the task ahead of servicing the bonds.
This failure is due to the fact that no one individual can be sure of the amount of tax
he will have to pay towards the servicing of the bonds each year in the future. Every
individual may, therefore, persuade himself to believe that he is richer with the bonds
with unidentified future tax obligations than he would be with tax receipts and no
such future obligation. Hence in the bond financing case the individual, feeling richer,
may cut his consumption less. As a result, a smaller amount of capital stock will be
7
Public Debt handed down to the second generation. The burden in this case consists in inheriting
by the second generation a smaller amount of capital stock than otherwise.

13.5.2 Buchanan Thesis

Professor Buchanan holds that the financing of a project by the government by
means of borrowing does shift a burden to the future generations. According to him,
the concept of burden should be interpreted in terms of the individual attitudes towards
their economic well-being rather than in terms of changes in private-sector outputs
and real income because of the inheritance by the latter generations of a larger or
smaller amount of capital instruments. Buchanan argues that during the period in
which the project is financed and borrowing takes place, no burden of any kind is
created; individuals who give loans to the government voluntarily exchange liquid
funds for less liquid government bonds instead of using the funds for acquiring
consumption and/or investment goods. Since this is done voluntarily by the individuals
concerned, they do not feel themselves to be any worse off. When, however, the
bonds are repaid in the future generation, funds are taken from the taxpayers to the
bondholders as a result, the tax payers feel themselves to be worse off, but the
bond holders are not better off since they have now merely changed bonds for cash.
In other words, as the bondholders are not worse off by changing cash into bonds
so also they can not be better off in the latter generations by the changing of bonds
into cash. But in the latter generations the tax payers are worse off since tax is a
compulsory payment. As a result, the society as a whole becomes worse-off during
the future generations. In this sense a burden is shifted to the future generations.

13.5.3 Musgrave Thesis

a) Transfer Through Reduced Capital Formation
If resources are fully employed, an increase in public services shifts resources from
the private to the public sector, leaving less for the production of private goods. In
this sense of resource release, the burden must be borne by the present generation.
A first mechanism of burden transfer is provide through reduced capital formation.
To see how it works, we once more return to the framework of a ‘classical’ system
where investment adjusts itself automatically to the level of saving forthcoming at a
full level of income. Given such a system, any transfer of resources from private to
public use leaves the private sector with fewer resources. In this narrow sense, the
burden of today’s public expenditures must be borne by today’s generation. But the
resource withdrawal from the private sector may be from consumption or from
capital formation. In the first case, the welfare of the present generation, as measured
by its consumption is reduced and the income of the future generation is unaffected.
In the second case, the consumption welfare of the present generation is untouched
while the future generation will inherit a smaller capital stock and thus enjoy a lower
income. In this sense, the future generation is burdened. If we assume further that
tax finance comes out of consumption while loan finance come out of saving (hence,
under the assumption of a classical system, out of investment)it then follows that
loan finance burdens future generations.
Preceding on the principal that public services should be financed on a benefit basis,
the nature of expenditure to be financed becomes of crucial importance. In the case
of public expenditures, the benefits will extend into the future, so that burden transfer
is called for as a matter of intergeneration equity.
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b) Transfer with Generation Overlap Theory of Public Debt

Absent generation overlap, reduced private capital formation is the only mechanism
by which the burden of domestic borrowing can be transferred to a future generation.
But such is not a necessary condition if two generations overlap in time. Suppose
that generation 1 lives from year one to year fifty, while generation 2 lives from years
twenty five to seventy five. Also suppose that all taxes come from consumption.
Now generation 1, in year one, may be called upon to pay taxes of $ 200,000 to
sustain the cost of a government building with a useful life of fifty years. It must do so
at the cost of reducing its own consumption by this amount. But it will then be
possible, in years twenty-five to fifty, to collect taxes of $100,000 from generation 2
in order to refund generation 1, thus involving a shift in private consumption from
generation 2 to generation 1.In this way generation 1, while initially assuming the
entire burden can transfer part of it to generation 2. For purposes of reassurance
generation 1 may be given a promise of repayment in the form of bonds, to be
redeemed later out of taxes imposed on generation 2. Such a transfer among
overlapping generations can function even though there is no effect on capital formation
in the private sector.
In contrast to this case, generation I may make a present to generation 2 and assume
the entire burden without calling upon generation 2 for repayment later on, which is
precisely the mechanism which applied when old age retirement pensions were
introduced and the initially aged were given benefits without having had to contribute.
c) Transfer with Foreign Debt
Having considered the role of domestic borrowing, we now turn to that of borrowing
from outside sources. The mechanism of burden transfer through foreign borrowing
differs in several respects. A first difference is that there is now no need for generation
1 to reduce its expenditures. Outlays in the private sector can remain intact because
the additional resources needed for the public outlay are acquired abroad via an
import surplus. Loan finance now imposes a burden on generation 2 not by leaving
it with a reduced capital endowment at home but by saddling it with an obligation to
service the foreign debt. Taxes must now be paid to finance interest paid to foreigners
rather than to domestic holders of debt. Generation 2 no longer owes the debt to
itself. This foreign debt burden replaces the loss of capital income which generation
2 would have suffered had there been domestic loan finance and a resulting reduction
in capital formation.
Compare now three sources of finance: (1) taxation, (2) domestic borrowing, and
(3) foreign borrowing. Assuming 1 to fall on consumption and 2 on capital formation,
1 will burden the present generation while 2 and 3 will burden the future. Even
though 2 and 3 are similar in this respect, the choice between them may not be a
matter of indifference. The answer depends upon the cost of borrowing at home
and abroad. If the cost is the same (if the return on domestic capital is the same as
the outside rate of interest), the burden on generation 2 will be the same in each
case. But if the domestic cost is higher, foreign borrowing may be preferable.
Reliance on foreign resources need not involve direct placement of the debt abroad
but may take indirect form. A similar result comes about if the debt is placed
domestically, with raising interest rates inducing capital inflow and once more an
import surplus. If channeled into consumption, generation 1 once more escapes the
burden while generation now pays the debt service to itself, but it must share part of
the national income with its foreign owners. 9
Public Debt d) Borrowing by State and Local Governments
The problem of intergenerational equity arises most acutely at the state and local
levels where the bulk of public investment expenditures are made and financed.
Suppose that a township is about to construct a school building, the services of
which will extend over thirty years it is only fair to spread the burden among the
successive generations of residents which will benefit from the service. The principle
of benefit taxation is applied in allocating the burden between generations.
To accomplish benefit taxation, the initial cost is covered by borrowing, typically in
outside markets. In subsequent years, future generations, resident and partaking of
the benefits are taxed each year in accordance with their current benefit share. In the
process the debt is amortized and repaid by the time the facility is used up. Once
more intergenerational equity is secured, with each generation paying for its own
benefit share. A township which finances its school building by borrowing and
amortizing the debt over the length of the asset life thus provides for an equitable
pattern of burden distribution not only between age groups but also between changing
groups of residents as the population of the jurisdiction changes in response to in-
migration and out-migration.
e) Burden Transfer in Development Finance
Although the mechanism of burden transfer may be used to spread the cost of public
investment, it can not be used to spread the cost of a development programme,
because the very objective of such a programme requires that total capital formation
(public or private) be increased. But no gain is made toward achieving this objective
if public capital formation is loan financed, where this causes the an offsetting decline
in the rate of private capital formation. Therefore the mechanism of burden transfer
through internal loan finance is inapplicable in the very situation where it would be
most appropriate.
Check Your Progress 3
1) What is the burden of public debt?
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2) Which factors should be taken into account while considering the burden of
public debt?
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3) What is Recardo-Pigou thesis regarding the transfer of public debt to future
generation.
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 ................................................................................................................... Theory of Public Debt

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4) How the burden of public debt is transferred to future generations through
reduced capital formation?
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5) What is the mechanism of burden transfer through foreign borrowing?
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13.6 LET US SUM UP

Public debt arises due to borrowing from the government. The borrowing of the
government may be from within the country that is internal debt or from outside the
country (external debt) or both. Government needs to borrow when current revenue
falls short of public expenditure. The purpose of the borrowing may also be for
influencing aggregate demand for maintaining stability in the economy.
Like private borrower a government may also borrow for consumption and investment
purposes. But a private unit can not borrow internally whereas the government usually
borrows from within the country. A private unit can repay debt either out of its
earnings or out of its assets or from other sources. The government can pay its debt
straight away by creating more of currency. Unlike private debt public debt is also a
tool of economic management in the hands of the authorities.
Mercantilists favoured public debt but Classical economists like David Hume, Adam
Smith and David Ricardo condemned the public debt because of their lack of faith
in the role of state in the economic activities. According to modern economists public
debt is an essential means of increasing employment and has become an instrument
of economic policy today.
The burden of public debt refers to the sacrifice it will impose and have effects on
the community through a rise in taxation, necessitated at the time of repayment and
for paying the annual interests on the government loans. Various factors should be
taken into account while considering the burden of public debt like the interest rate,
strains and frictions imposed on the economy, ratio of total debt to total national
income, unemployment, impact on work incentive, saving and risk propensities,
impact on income distribution etc.
Another important question is whether the system of financing a project by means of
public debt shifts the burden to the future generation. How does such a burden 11
Public Debt transfer come about and what is its bearing on fiscal equity? According to Ricardo
Pigou thesis, if the government expense is financed by taxation, the first generation
hands on to the second nothing but tax receipts; if by bond issue, the first generation
bequeaths the bonds to the second generation, but along with them, a tax liability
represented by the annual charge on the debt for interest. The welfare of the second
generation, however, depends not on whether it inherits tax receipt or government
bonds, but on what it inherits in the way of real stock of capital; and this latter
inheritance depends on the reaction of the first generation to the taking away of real
resources by the government.
Professor Buchanan holds that the financing of a project by the government by
means of borrowing does shift a burden to the future generations. According to him,
the concept of burden should be interpreted in terms of the individual attitudes towards
their economic well-being rather than in terms of changes in private-sector outputs
and real income because of the inheritance by the latter generations of a larger or
smaller amount of capital instruments.
Musgrave explains the transfer of public debt through reduced capital formation,
transfer with generation overlap, transfer with foreign debt, borrowing by state and
local governments and burden transfer in development finance.

13.7 KEY WORDS

Mercantilist Doctrine : An economic and political doctrine developed
between 1500 and 1775. Mercantalists held
that gold and silver are the most important
form of wealth and the best way to increase
wealth is to import less than exports.
Classical Economics : A group of 18th and 19th century economists
whose ideas dominated economic thought
from about 1775 to 1850. Underlying their
idea was the belief that, without government
interference-that is with laissez faire policies
–individual initiative and perfect competition
would result in the best possible economic
development, assuring full employment and
adequate profits.
Laissez Faire Policy : A policy of non-interference by the state in
economic affairs. The underlying philosophy
is that man is moved predominantly by self
interest and that there exist certain immutable
laws which produce a natural harmony. It is
argued that if everyone is left alone to pursue
his own interests (to produce, buy and sell,
borrow and lend) without outside
interference, then the result will be to the
mutual benefit of all. The laws of supply and
demand will ensure the best deployment of
capital and labour; the function of government
is, therefore to act as umpire and not to take
12 part in the game.
Fiscal Policy : Fiscal Policy of the government to change Theory of Public Debt
revenue and expenditure to bring desired
changes in economic activities.
Burden of Public Debt : The burden of public debt refers to the
sacrifice when imposed and have effects on
the community through a rise in taxation,
necessitated at the time of repayment and for
paying the annual interests on the government
loans.

13.8 SOME USEFUL BOOKS

Ganguly Subrata (1992) Public Finance a Normative Approach, The World Press,
Calcutta.
Bhatia H. L. (2003) Public Finance, Vikas Publishing House, New Delhi.
Musgrave Richard A., Musgrave Peggy B. (1989 ) Public Finance in Theory and
Practice, McGraw -Hill Singapore.
Buchanan, J.M. (1958) Public Principles of Public Debt, A Defence and
Restatement, Richard D. Irwin Homewood.
Auerbach, A.J. and M.Geldstern (Eds.) (1985), Handbook of Public Economics,
Vol.1, North Holland, Amsterdam.
Buchanan, J.M. (1970), The Public Finances, Richard D. Irwin, Homewood.
Houghton, J.M. (1970), The Public Finance: Selected Readings, Penguin,
Harmondsworth.

13.9 ANSWER OR HINTS TO CHECK YOUR

PROGRESS
Check Your Progress 1
1) See Section13.1
2) See Section 13.1
3) See Section 13.2
Check Your Progress 2
1) See Section 13.3
2) See Section 13.3
4) See Section 13.3
Check Your Progress 3
1) See Section 13.4
2) See Section 13.4
3) See Section 13.5.1
4) See Sub-section 13.5.1
5) See Sub-section 13.5.3(c)
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Public Debt
13.10 EXERCISES
1) What is public debt? What is the difference between public and private debt?
2) Explain different views regarding public debt. Why did classical economists
oppose public debt?
3) How does public debt impose any burden on the community concerned? Explain.
4) Can the burden of public debt, if any, can be shifted to subsequent generations?
5) Explain Musgrave thesis regarding the transfer of public debt to future
generations.

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