Need for Public Debt or Public Borrowing

Owning to ever-increasing economic and developmental activities of the government, governments across nations have accumulated huge sums of public debt. The recent global economic crisis forced many advanced countries, such as the US, to accumulate huge amounts of debt. The US and Indian budget deficits stood at 72.5 % and 49% of their respective GDPs as of 2012.

Public debt has assumed significant importance in recent years because of the following reasons:

1. Deficit Budget:

The government borrows to cover the bridge’s temporary budget deficit raised due to large expenditures incurred on administration and for financing unforeseen events like floods, famines etc. In such an event, taxes cannot entirely bridge the budget deficit, as people oppose temporary taxes.

2. To Finance War:

The government borrows funds to finance wars. Modern wars are costly due to the use of modern ammunition and tools. They cannot be financed entirely through taxation. Thus, public debt becomes necessary. Moreover, defence is a sign of a country’s strength, and the government spends huge sums of money on its upkeep.

3. Natural Calamities:

Natural calamities like earthquakes, floods, famines etc., lead to an increase in government expenditures in order to provide relief to the victims and to build new infrastructure. In order to finance its expenditure government borrows funds.

4. Economic Development:

Public debt is considered an important tool for the economic development of a country. Countries raise funds both internally and externally. Developing countries lack resources to finance their expenditures on public enterprises, projects involving huge capital with long gestation periods and other social-economic programs and infrastructure.

Moreover, these projects cannot be financed totally from government revenues. Developed countries borrow to modernize and upkeep their infrastructure facilities like roads, railways, power plants etc.

Furthermore, developing countries are characterized by low saving ratios, low effective demand, unemployment and large-scale poverty. Here the rate of capital formation and private investment is relatively low, and thus is the rate of income generation. Thus, the government has to increase investment, and it can secure capital for investment by raising public debt.

5. To finance Public Enterprises:

Public revenue generated through sources such as tax and non-tax levies is insufficient to meet the growing requirement of funds for financing public enterprises such as roads, railways, telecom etc. The government can meet these requirements through public borrowing.

6. To Check Economic Stability:

The government borrows to stabilize the economy, to provide a safeguard against depression, and to control inflationary conditions. In a period of depression level of aggregate demand is low. Hence the government borrows to spur up investment and employment and hence to raise effective demand.

In periods of high inflation, when there is an excess supply of money, the government resorts to borrowing funds from the public to reduce the money held with the public in an attempt to control demand and inflation.

7. To Provide Foreign Exchange:

In case of the balance of payment deficit, Foreign exchange is required to correct it. The government borrows foreign exchange reserves from foreign governments and from international financial institutions.

8. Soft Revenue Option:

Increasing taxes are often met with opposition from the public. Moreover, governments are always in need of funds. Government borrowings are a soft revenue option for meeting ever-increasing expenditures.

In recent times, the need for public borrowing has increased to factors like increasing expenditure on social security schemes, increase in prices, growth of administrative expenses etc.

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