Classification of Public Debt

Types of Public Debt

Based on its characteristics, Public Debt can be classified into the following:

(1) Internal & External Debt: Internal debt refers to government loans secured within the country from the public and financial institutions. The government raises loans through treasury bills, bonds, loans etc.

On the other hand, the debt incurred through borrowings of the government from foreign governments and international institutions such as the World Bank, IMF etc., is classified as external debt.

(2) Productive & Unproductive Debt: Productive debt is defined as a loan which is used for productive purposes and is used to add to the productive capacity of an economy. Such projects involve a long gestation period. Therefore, such loans are generally long-term. They yield income to the government like railways, construction, irrigation, power etc. and are self-liquidating.

Unproductive debt does not yield any income to the government and is incurred to cover budgetary deficits and finance expenditures related to natural calamities, war and other unforeseen events etc. It is also known as deadweight debt as it does not lead to any asset creation.

(3) Short-term and Long-term Debt: Short-term debt is defined as that debt which is repayable within a period of three to four months, i.e. must be paid within a year. This debt is like treasury bills and ways and means advances from the central bank. No separate funds are created for such debts. They are used for temporary purposes and generally carry a low rate of interest.

Long-term loans are generally repayable after a period of a year and bear a higher rate of interest. They have funded debts as debt is paid out of a fund created for the purpose of repayment.

(4) Voluntary & Compulsory Debt: Voluntary debt is defined as debt that is paid without any legal enforcement. The public is free to subscribe to such debts, whereas compulsory debts are those debts which are forcibly enforced by the government and hence are involuntary. Though rare, such debts are raised during wars, calamities and emergencies.

(5) Marketable and Non-Marketable Debt: Marketable debts are securities that are negotiated in the open market. For example, securities sold in the secondary market. Non- Marketable loans are securities that cannot be sold in the open market, for example, provident funds, NSC etc.

Public and Private Debt

There has been a wide-ranging debate between classical economists and postclassical economists such as Keynes over what constitutes public and private debt. Private debt refers to debt incurred by individual economic units to expand and manage their business activities. Private companies raise funds by selling equity shares in the company or through debt financing in the form of loans and lines of credit.

While the classical economist considered public debt as bad for the economy as it is not conducive to the creation of wealth and, therefore, it must be constrained. However, Keynes argued that public debt differs from private debt as it can be raised from external sources. Government borrowings resemble private debt in certain aspects, but the differences between the two are more prominent.

The following are the key parameters on which public debt differs from private debt:

● The government can compel the public to lend funds to it in case of war, natural calamities or even during periods of economic crises. However, in the case of private debt, an economic entity cannot force or compel another individual/ entity to lend it money.

● Under abnormal conditions, a government can refuse the repayments of public debt, but private individuals/ entities cannot refuse repayment of loans.

● Because of the inherent nature of the government and high creditworthiness, it can borrow from the public for longer periods. Even it can borrow at a lower rate of interest. However, private individuals/ entities do not enjoy such liberties. Due to the risk involved on the part of the lender, they can borrow only for a short period of time and are generally charged a higher rate of interest.

● The government can repay its loans through revenues collected through taxes and non-tax duties. Private debt is repaid through the fund’s own sources, such as reserved savings.

● Public debt has a significant impact on the well-being of an economy, and excessive public debt can be a sign of economic weakness. With regard to private debt, both theoretical and empirical evidence show that recessions are steeper in countries with high levels of private debt, but the overall economic effects of the debt measures on GDP and consumption growth are limited.

Read More in: Theory of Public Finance

1. Public Finance: Meaning, Nature & Scope
2. Role of Government in Economy
3. Role of Government in Mixed Economy: Public & Private Sector
4. Role of Government under Cooperation and Competition
5. Role of Government in Economic Development and Planning
6. Concept of Public Goods, Private Goods, and Merit Goods
7. Concept of Market Failure and Functions of Government
8. Market Failure and Functions of Government: Decreasing Costs
9. Market Failure and Functions of Government: Externalities
10. Market Failure and Functions of Government: Public Goods
11. Future Market: Meaning, Role & Uncertainty
12. Concept of Information Asymmetry
13. Theory of Second Best: Concept & Explanation
14. Problem of Allocation of Resources: Public & Private Mechanisms
15. Preferences: Meaning, Types & Problems of Preference Revelation
16. Preference Aggregation & Its Mechanism
17. Voting Systems, Direct Democracy, Representative Democracy, Leviathan Hypothesis & Arrow’s Impossibility Theorem
18. Economic Theory of Democracy: Concept & Explanation
19. Politico Eco Bureaucracy: Concept & Explanation
20. Rent-Seeking and Directly Unproductive Profit-Seeking Activities
21. Rationale for Public Goods: Concept & Explanation
22. Benefit Theory or Voluntary Exchange Theory
23. Lindahl Model: Concept, Equilibrium & Limitations
24. Bowen Model: Concept, Advantages & Limitations
25. Samuelson’s Model of Public Expenditure
26. Musgrave’s Model of Public Expenditures
27. Demand Revealing Schemes for Public Goods
28. Vickery-Clarke-Groves Mechanism
29. Groves-Ledyard Mechanism
30. Tiebout Model: Concept, Assumptions Equilibrium & Simple Tiebout Model
31. Theory of Club Goods
32. Keynesian Principles of Stabilization Policy
33. Difference Between Keynesian Economic Thought and Others
34. Role of Expectations and Uncertainty in Formulating Stabilization Policy
35. Intertemporal Markets Efficiency & Failure
36. Liquidity Preference Theory
37. Diamond-Dybvig Banking Model
38. Preference Shocks, Adverse Selection & Central Bank
39. Equilibrium Deposit Contract
40. Social Goods and Its Effect on Stabilization Policy
41. Effect of Infrastructural Facilities on Stabilization Policy
42. Effect of Distributional Inequality on Stabilization Policy
43. Effect of Regional Imbalances on Stabilization Policy
44. Wagner’s Law of Increasing State Activities: Explanation, Graph & Criticism
45. Peacock-Wiseman Hypothesis: Explanation, Graph & Criticism
46. Public Expenditure: Concept, Objectives, & Public vs Private Expenditure
47. Pure Theory of Public Expenditure
48. Structure & Growth of Public Expenditure in India
49. Trends, Lessons & Priorities in Public Expenditure in India
50. Social Cost-Benefit Analysis: Project Evaluation, Estimation of Costs & Discount Rate
51. Performance Based Budgeting and Zero Based Budgeting
52. Theories of Tax Incidence: Concentration Theory, Diffusion Theory & Modern Theory
53. Tax System and Its Principles
54. Equity Principle and Efficiency Principle of Taxation: Meaning, Explanation & Examples
55. Ability to Pay and Benefits Received Principle of Taxation
56. Theory of Optimal Taxation: Excess Burden & Distortions of Taxation
57. Deadweight Loss of Taxation: Causes, Measurement & Example
58. Concept of Equity & Efficiency in Economics
59. Trade-Off Between Equity and Efficiency: Meaning & Example
60. Theory of Measurement of Dead Weight Loss
61. Double Taxation: Meaning, Desirability, Forms & Solution
62. Solution to Problem of Double Taxation: Intra-Country & International
63. Double Taxation Avoidance Agreement (DTAA) and Indian Policy
64. Classical View on Public Debt
65. Compensatory Aspect of Public Debt Policy
66. Public Debt or Borrowings: Concept, Need, Sources & Types
67. Concept of Public Debt or Public Borrowings
68. Need for Public Debt or Public Borrowing
69. Sources of Public Debt
70. Classification of Public Debt
71. Burden of Public Debt: Meaning, Types & Explanation
72. Debt Through Created Money or Deficit Financing
73. Public Debt (Public Borrowings) and Inflation (Price Level)
74. Crowding Out of Private Investment and Activity
75. Principle of Public Debt Management and Debt Repayment