PUBLIC DEBT
SUBMITTED TO: DR. POOJA SIKKA
SUBMITTED BY: ASTHA(16), JESSICA(28), KARAN CHOUDHARY(65), JESUS GOYAL (76)
TABLE OF CONTENTS
[Link] TOPICS PRESENTED BY
1. INTRODUCTION JESSICA
2. MEANING ASTHA PALIWAL
3. OBJECTIVES AND IMPORTANCE JESUS
4. DIFFERENCE BETWEEN PUBLIC DEBT AND KARAN CHOUDHARY
PRIVATE DEBT
5. CLASSIFICATION OF PUBLIC DEBT JESSICA
3. ROLE ASTHA PALIWAL
4. BURDEN OF PUBLIC DEBT JESUS GOYAL
5. METHODS OF REDEMPTION KARAN CHOUDHARY
6. CONCLUSION KARAN CHOUDHARY
1. INTRODUCTION
Public debt is a modern invention and was not heard prior to 18th century, Bastable
holds that in its present form, the public debt is the creation of the last two centuries.
The monarchs used to amass treasure in peace to be used in the times of need. The
practice of raising loans grew gradually.
In the middle ages, there was a strong sentiment against usury. The king borrowed
money on personal credit or pledged his domains as security. The loans were
obtained from the church or from foreign bankers. Borrowings became common in
England and France with an increase in the cost of government.
In the nineteenth century, under the influence of 'Laissez faire' philosophy, economic
life was restricted only to unavoidable minimum duties of the state with the result
that functions performed by the State were only essential few. But in the modern
times, the growth of public debt is the result of changing economic and political
institutions.
"Public debt is a comparatively modern phenomenon and has come into existence
with the development of democratic form of Government in the world."
2. MEANING OF PUBLIC DEBT
Prof. J.K. Mehta: "Public revenue, therefore, consists of the money that the government is not obliged to
return to the very individual from whom it is obtained. Public debt on the other hand, carries with it the
obligation on the part of the government to pay money back to the individuals from whom it has been
obtained.
Prof. Findlay Shirras: National Debt is a debt which a state owes to its subject or to the nationals of Prof.
Findlay Shirras other countries other countries.
Prof. P.E. Taylor: "The debt is the form of promises by the Treasury to pay to the holders of these
promises a principal sum and in most instances interest on that principal. Borrowings is restored to in order
to provide funds for financing a current deficit."
Prof. Carl S. Shoup: "The receipt from the sale of financial instrument by the government to individuals
or firms in the private sector to induce the private sector to release manpower and real resource and to
finance the purchase of those resources or to make welfare payments or subsidies."
3. OBJECTIVES & IMPORTANCE
To fill the gap between revenue & expenditure
To fight depression by public investment – confidence problem
To curb Inflation –reduce purchasing power with public
To finance economic development
To meet emergencies- famines, floods, epidemics, earthquakes
Unpopularity of taxation- when taxable capacity is reached
War finance
To correct mal allocation of resources
Expansion of education & public services
To create infrastructure
4. DIFFERENCE BETWEEN PUBLIC
DEBT & PRIVATE DEBT
PUBLIC DEBT PRIVATE DEBT
[Link] Compel/force to lend No compulsion
2. Loans for very long period as govt is permanent [Link] for short period only
3. Borrow from both inside & from outside 3. Domestic borrowing only
4. Loans are taken for productive purpose 4. Both productive and unproductive purposes
5. Purpose-Social welfare [Link]- private profit
6. Can levy taxes for repayment Not possible
7. Low interest High interest
8. High credit worthiness Low creditworthiness
9. Refuse to repay Cannot refuse
5. CLASSIFICATION
OF PUBLIC DEBT
INTERNAL & PRODUCTIVE
EXTERNAL AND unproductive
DEBT DEBT
REDEEMABLE
SHORT TERM
AND
AND LONG
IRREDEMABLE
TERM DEBT
DEBT
VOLUNTARY
FUNDED AND
AND
UNFUNDED
COMPULSARY
DEBT
DEBT
MARKETABLE
AND NON- GROSS AND NET
MARKETABLE DEBT
DEBTS
5.1 INTERNAL AND EXTERNAL DEBT
Internal Debt: - Internal debts are those public debts taken from the country inside, but the
external debt is a debt taken from foreign governments. Foreign people and international
organizations, In Dalton's words, “A debt is internal if given by those people or organizations
living in that area that is controlled by the local officer of taking debt.
External Debt: - A debt is external, if given by those people and organization living outside of
that area”. By the payment of interest on foreign debt, there is a reduction in net income of
debtor country because their income’s big part goes to the foreign country, but it doesn’t effect
at the time of paying interest on internal debts. Whether the interest on internal debts leave on
tax payers or taken from them and paid as a form of interest on war debts, it does not affect the
national income of the country, that becomes stable like before. This is form of method by
which money is taken from the taxpayer one pocket is been debt in another pocket.
5.2 PRODUCTIVE AND
UNPRODUCTIVE DEBT
Productive debt: - Productive debts are those debts which
are used in those plans which provide income, like railway,
plans of electricity and the plans of irrigation. The income
got from these plans can be used to the payment of yearly
interest and for the payment of Principle. So, productive or
reproductive debts are those debts where are same costs or
the assets of more cost kept. By this, productive debt never
put pressure on government and taxpayer.
Unproductive debt: - unproductive debts are those debts
used in that plans, no income is provided, for example,
war. So, unproductive debts are those debts, no assets is in
the back. The main reason of unproductive debt is not only
on war but at some point the losses of interest is also the
reason
5.3 REDEEMABLE AND IRREDEMABLE DEBT
Redeemable debt: - Redeemable debts are those debts the government
promises that he will pay back the debt on a fixed date. These debts are also
called terminable debt.
Irredeemable Debt :-Irredeemable Debts are those debts which are without
any promise they are called irredeemable or perpetual debt. When debts are
not returned then the governments have to do same arrangement to paid
back the debt. If government decides that these debts will be paid back from
the tax income, which is the best way in almost all the situations for this
work they have to put new taxes. So in the condition of redeemable debts
government have to pay both interest and principle amount on a fixed future
coming date.
5.4 SHORT TERM AND LONG TERM
DEBT
Short Term Debt: -When government takes debt for a short period,
then this is called short term debt. These debts are paid back in the
time period with in a year that is to be taken to complete the tenure of
debts.
Long Term Debt: - When governments take debt for a very long
period then this is called long term debit. The time of giving it back is
not fixed. At that time the debt is paid back, the debt giver got regular
interest.
5.5 FUNDED AND UNFUNDED DEBT
Government debt can also be divided in the form of
funded and non-funded debt. Funded debts: - Funded
debts are long term debts. Payment of these debts can
be done within one year or it can be possible, not to
give any promise regarding this in other words funded
debts are those debts, in which the payments are given
with in, one year.
Unfunded debts: - Treasury bonds are unfunded debts,
because these debts are given for three or six months
and their time period is not more than one year. Even
then, this is clear that in the condition of funded debts,
government is responsible to pay the regular payment
of interest to the debt payer; yes, their basic money
payment is totally left on the government.
5.6 VOLUNTARY AND
COMPULSARY DEBT
Voluntary debt: - Government debts are normally of
voluntary nature and to person and organizations
controlled by the government bonds are voluntary.
Compulsory Loans: - Today compulsory loans are not
much popular but in the condition of war, government
are can put pressure on people to give loans.
Government can also help in the condition of
depression, so that work power from the hands of
people could be reduced and stop the increasing rates.
5.7 MARKETABLE AND NON-MARKETABLE
DEBTS
Marketable debts: - it includes government securities; whose sale and
purchase is not possible independently.
Non-Marketable debts: - In opposite, those securities are included in non-
purchasable debts, whose sale and purchase is not possible in the open
market and can only give back to the government on a fixed rate.
5.8 GROSS AND NET
DEBT
Total Debt: - On a fixed time,
whatever debts governments have,
the total of all is called total debt.
Net Debt: - If government collects
any fund to pay back the debts, then
the amount of that fund subtracted
from the total debt and whatever left
is called net debt.
6. ROLE OF PUBLIC
DEBT
The classical economists believed in the policy of
balanced budget. They did not consider the public debt
suitable. But in the modern age, the economic and
developmental functions of the government have
multiplied. Owing to the increase in these functions,
public expenditure, too, has increased correspondingly.
In order to meet this increase in. expenditure, the
government has to secure money from various sources.
The importance of public debt among all such sources
has increased very much. The significance of the public
debt becomes clear by the following factors:
Safeguard Against To Bridge Temporary
Economic Development
Depression Deficit
Breaking of the Vicious Establishment of Public
Economic Stabilisation
Circle of Poverty Enterprise
Special Importance to
Social Welfare: Emergency Underdeveloped
Countries
6.1 Economic Development: For the economic development of the
underdeveloped countries, expenditure on public sector increases tremendously. Most of
the development projects are long-term projects. As a result thereof, capital formation
takes place. In order to complete these capital and long-term projects; the government has
to spend a lot of money. This money cannot be mobilised through taxes alone. Seeking
debt becomes imperative for it. Thus, public debt has assumed great importance for the
economic development of a country.
6.2 Breaking of the Vicious Circle of Poverty: Underdeveloped
countries are characterised by vicious circle of poverty. In these countries, capital
formation is low because saving is low Saving remains low because the income of the
people is low. Income of the people is low because the productivity is low. Productivity is
low because the rate of capital formation is low. In this way, this vicious circle of poverty
continues. In order to break this vicious circle, it is essential for the government to
increase the amount of investment. For th this purpose, capital is needed. Public debt is an
important means of securing capital for investment and thereby, breaking the vicious
circle of poverty
6.3 Social Welfare: Modern economists believe that human capital is
very important for the economic development of the country. For the
development of human capital,The development of social welfare schemes like
education, health, general insurance, etc., is very essential. A lot of money is
needed by the government in order to run these projects. This money can be
secured through public debt.
6.4 Emergency: In an emergency, the government expenses increase, but
its income does not increase proportionately. A lot of money has to be spent by
the government at the time of wars, floods, epidemics, famines, etc. The
requirement of money in such situations is met by public debt. Such debts are
secured either within the country or from the foreign countries.
6.5 Economic Stabilisation: The government has to seek public debts owing to the
economic stabilisation also. Sometimes, the supply of money Increases with the people,
Because of it, prices also go up. So, in order to bring down the prices, It becomes essential to
reduce the supply of money. In order to reduce the supply of money, the government seeks
loans from the public even though it does not require this amount. As a result thereof, the
supply of nioney with the public goes down. Thus, public debts are secured for the effective
implementation of economic stabilisation, too.
6.6 Safeguard Against Depression: According to Keynes, public debt is a major
source of providing a safeguard against depression In the country. During depression,
aggregate demand in the country is low. As a result, production is low and unemployment
increases. Public expenditure has to be compulsorily increased in order to avoid the situation
of low production and unemployment. The demand in the country will go up and thus, greater
stability will be achieved. Public debt is a significant means of removing unemployment.
6.7 Special Importance to Underdeveloped Countries: Public debt has a special
importance to the underdeveloped countries. In these countries, only a limited income can be earned
through taxes. Here, the taxation system lacks flexibility and productivity. Public appases both the
additional taxation and the increase in the existing rate of taxes. More tax evasion takes place here.
Public debt is voluntary. As a result of it, although consumption decreases only marginally, yet, the
saving saving gets a boost. In the u a boost. In the underdeveloped countries, there is a limit to
mobilise resources through taxation. Thus, the importance of public debt has increased:
6.8 To Bridge Temporary Deficit: The government secures loans in order also to bridge the
temporary budget deficit. It is so because the taxes do not yield income quickly and people, too,
oppose temporary taxes huh
6.9 Establishment of Public Enterprises: The government takes big loans for the
establishment of public enterprises also. The government may have to nationalise the private sector
for various reasons, or may have to take over the sick units. For the financing of these activities,
loans are taken.
7. BURDEN ON PUBLIC
DEBT
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.
KINDS OF BURDEN ON
PUBLIC DEBT
INTERNAL EXTERNAL
BURDEN ON BURDEN ON
PUBLIC PUBLIC
DEBT DEBT
INTERNAL BURDEN AND EXTERNAL
BURDEN
MONEY
BURDEN DIRECT
MONEY
BURDEN
UNDIREC
T MONEY INDIREC
BURDEN T
MONEY
BURDEN
INTERNA
L EXTERN
BURDEN ALBURD
DIRECT EN
REAL DIRECT
BURDEN REAL
BURDEN
INDIRECT
REAL INDIREC
BURDEN T REAL
BURDEN
7.1 INTERNAL BURDEN
Internal Burden of Public Debt. Prof. Dalton defines internal
debt as "A loan is internal if subscribed by persons or institutions
within the area controlled by the public authority which raises
the loan." In the opinion of Prof. Dalton, the burden of internal
public debt is not much significant as the payment of principal
amount and its entire involves taxation. It is merely transfer of
purchasing power from one person to another In other words,
money does not flow out of the national money market.
1. Money Burden. Direct money by burden is equal to the amount of goods and Directives
by the people due to rise in taxes. It is measured by the amount services payment involved and
the amount of taxes, are to be raised to meet the revenue requirements. In fact, the internal
public debt is of no importance because the payment request on the debt and the principal
amount taken as loan involves taxation and it nothing but the transfer of purchasing power from
the tax-payers to the bond-holders notes the tax-payers and the bond-holders are the same
people.
For instance, when any government raises a loan, money is simply transferred from the lenders
to the government which is spent for public welfare activities in the country. Therefore, in case
of such debt. there is no direct burden on the community. But, if the tax-payers and bond-
holders belong to different groups, there may occur changes in the distribution of income among
the people who belong to different groups within the community. Thus, money does not flow
out of the national money market. In this context, words of Prof. Dalton are relevant
"Thus all transactions connected with an internal debt resolves themselves into a series of
transfers of wealth within the community. It follows that there can never be any direct money
burden or direct money benefit of an internal debt.
2. Indirect Money Burden. When loans taken by the government are to be spent on development projects, it
results in the creation of demand for several commodities and services. As a result of this, prices of the goods and
services rise and thus, impose a new burden on the society. Sometimes, taxes are increased to meet the repayments.
Such an increase in taxation affects the level of production. This adversely affects people's desire to work, save and
ability to work. Ratchfold is of the opinion that such a debt is a burden because when joined with a progressive tax
system, it substantially restricts investment and, thus, involves reduction in national income.
3. Direct Real Burden. In case of internal debt, the government repays the principal amount along-with the
interest by imposing new taxes on the people. It is obvious that the tax-payers are poor people while the lenders are
relatively rich. In such a case, it results in the transfer of the purchasing power from the poorer sections to the richer
sections of the community. With this change in the distribution of income, more burden will fall on the poorer
sections of the society. Thus the result of the repayment of internal public debt is that the wealth get rom find from
the active sections of the society to the passive sections of the society. Tho in favour of the national interests. Hence,
it is the direct real he debt burden of inter-man
4. Indirect Real Burden. For the repayment of public borrowings, the government es additional taxes on the
common masses. Generally, most of the taxes are impotent mor people in the form of indirect taxes which results in
the rise of economic dishpan inequalities. It adversely affects the willingness to work and save. It discourages the
individuals and they do not wish to work and save more because of heavy dose of tractor.
7.2 EXTERNAL MONEY BURDEN
External Public Debt. External debt means the money borrowed from Dori
duals, associates belonging to the foreign countries. External debt also
consists ofloan taken from foreign governments. loan is external if subscribed
by persons or institutions outside this area."
External debt means the transfer of wealth from the lending to the borrowing
entry when, or in the reverse director rowing interest is periodically paid or
when the principal is repaired
The burden of external debt like that of internal debt is being discussed in the
following manners:
1. Direct Money Burden. In an effort to repay the loan and interest, the debtor lion is deprived
of certain goods and services. Every year, a large amount of money has be paid by the debtor
country in lieu of interest on the loan. After maturity of period the principal amount has to be paid in
the form of foreign exchange. This is possible only rough making exports without getting any
payment from foreign countries. Such type exports are called as 'unrequired exports'. This is the
direct money burden of an external debt.
2. Indirect Money Burden. The debtor nation often pays interest in terms of the pods and
services to the creditor country. That means, the debtor has to export goods and services in a huge
quantity. As a result of this, the price of these goods and services in the country shoot up and
sometimes, it creates scarcity of these goods. This leads to the loss of economic welfare of the
nation. From one angle, foreign debt is a blessing in guise as it pushes the production to manifolds at
home. But, it is a fallacious view as mystic resources are exhausted only for the sake of repayment of
debt.
3. Direct Real Burden: Direct real burden is measured by the loss of economic welfare which these
payments involve to members of the debtor community." Prof. DALTON is obvious that the burden of
these taxes will fall more on the weaker sections of the imposes new taxes on the people H. Dalton, Public
Finance' society. Hence, it is the direct real burden of external public debt. Not only that in an eff to pay the
external debt, debtor community is deprived of certain benefits, in a real sense it represents the direct real
burden.
4. Indirect Real Burden: To pay off the external debt, taxes are imposed on the people. Heavy taxes,
adversely affect the willingness and ability of the people to work and save. This has unfavourable effect on
production. Further, the heavy debt payment a checks the public expenditure on productive channels which
is otherwise socially desirable
8. REDEMPTION OF
DEBT
Redemption of debt refers to the repayment of a public
loan. Although public debt should be paid, debt
redemption is desirable too. In order to save the
government from bankruptcy and to raise the
confidence of lenders, the government has to redeem
its debts from time to time.
Sometimes, the government may resort to an extreme
step, such as repudiation of debt. This extreme step is,
of course, violation of the contract. Use of repudiation
of debt by the government is economically unsound.
Methods of redemption
USE OF
TERMINAL
REFUNDING BUDGETRY SINKING FUND
ANNUITY
SURPLUS
STATUTORY
DEBT REDUCTION IN ADDITIONAL
CAPITAL LEVY
CONVERSION RATE OF TAXATION
INTEREST
USING TRADE
SURPLUS
Method 1- Refunding:
The government often issues new bonds for raising new loans in order to pay-off the matured loans (i.e., an old debt).
Thus, the government takes a fresh loan in order to repay an old debt. When the government uses this method of
refunding there is no liquidation of the money burden of the public debt. Instead, the debt-servicing (i.e., repayment of
the interest along with the principal) burden gets accumulated on account of the postponement of the debt-repayment
to some future date.
Method 2- Use of Budgetary Surplus:
Sometimes, a government is able to generate a surplus in the budget. In such a situation, the government is left with
two options. It can either reduce taxes or repay some of its old debt. In general, the government makes use of the
budgetary surplus to buy back from the market (the people) its own bonds and securities. As a result, there is an
automatic liquidation of the debt liability of the government.
Method 3 - Terminal Annuity:
In some countries, the government follows the practice of paying-off the debt on the basis of terminal annuity. By
using this method, the government pays-off its debt (which includes both interest and the principal) in equal annual
[Link] method often finds favour with the planners and policymakers in developing countries like India
because it leads to a fall in the burden of public debt every year. The government is not required to repay the entire
debt at a time (i.e., it is not required to make one huge lump-sum payment in order to repay the debt).
Method 4 - Sinking Fund:
Sometimes, this government of a country establishes a separate fund known as the ‘Sinking Fund’ for the
purpose of repaying its debt. Under this system, the government goes on crediting a fixed amount of
money to this fund every [Link] the time the debt matures, sufficient money gets accumulated in the
fund so as to enable the government to repay the debt along with interest. In general, there are, in fact,
two alternative ways of crediting sums to this fund. The usual procedure is to deposit a certain (fixed)
percentage of its annual income to the fund. A preferable alternative for the government is to raise a new
loan and credit the proceeds to the sinking fund. However, some economists do not treat the second
method with favour. For example, Dalton has opined that it is in the Tightness of thing to accumulate a
sinking fund out of the current revenue of the government, not out of new loans.
Method 5 - Debt Conversion:
Sometimes, a high interest debt is converted into a low-interest one. The question here is: when is this
possible? Let us suppose the government contracts the debt when the existing rate of interest is quite
high. But after some time the market rate of interest may fall. This gives the government an opportunity
to convert its high-interest debt into a low-interest one. And, the government is enabled to reduce the
burden of public debt. If the interest burden of public debt falls the government is not required to raise
huge revenue through taxes to service the debt. Instead, the government can reduce taxes and provide
relief to the taxpayers in the event of a fall in the rate of interest payable on public debt. Since most
taxpayers are poor people and bondholders are rich, such debt conversion is likely to improve the pattern
Method 7 - Additional Taxation
Sometimes, the government imposes additional taxes on people to pay interest on public debt. By levying new
taxes, both direct and indirect, the government can collect the necessary revenue so as to be able to pay-off its old
debt. However, this method is often criticised on the ground that it creates inequality in the distribution of income
by redistribution (transferring) income from taxpayers to the bondholders. This is why it is said that if income-tax
revenue is used to pay interest on public debt there is a net burden on the community.
Method 8 - Capital Levy:
In times of war or emergency most governments follow the usual practice of repaying its debt by imposing a capital
levy on its citizens. Keynes also agreed to this method when he discussed the different methods of paying for a war.
A capital levy is just like a wealth tax inasmuch as it is imposed on capital assets. This method serves a two-fold
purpose: (1) Prima facie, it enables to the government to repay its wartime debt by collecting additional tax
revenues from the rich people (i.e., people who have huge private property and wealth); (2) Secondly, such capital
levy, imposed at progressive rates in capital assets, also helps reduce the degree of inequality in the distribution of
income and wealth.
Method 9 - Using Trade Surplus:
The methods discussed above are used to repay internal debt. However, when the government borrows from other
countries, it has to service the debt in foreign exchange. The burden of country’s external debt is measured by its
debt-service ratio, which is a country’s repayment obligations of principal and interest for a particular year on its
external debt as a percentage of its exports of goods and services (i.e., its current receipts) in that year.
9. Conclusion
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
