What are the effect of Public Debt? Explain.

What do you understand by Public Debts? Discuss the economic effects of Public Debt.

Ans.

Effects of Public Debt

Public debt has a great effect on the economic activities of the country. The effect of the public debt on (i) Production (ii) Distribution (iii) Consumption (iv) Price Level can be described in the following way-

(1) Effects on Production: Public debt has both good and bad effects on production. So, the effect of public debt on production can be studied in two parts:

(a) Good Effect: Public debt may have a good effect on production in the following situations – (1) When public debt is utilized for making an increase in production or for setting up industries, it increases the national production, people begin to get employment; their income goes up; they can save more. Thus, public debt has a good effect on the production of the country. (2) If public debt is used for the development of the means of transport, power projects, heavy industries and irrigation, etc., it will have two effects: first, capital formation in the country will be encouraged, and secondly, further development of domestic production will take place. (3) If public debt leads to increase in production to such an extent that the repayment of capital amount and the payment of interest are possible then no new taxes will be imposed, and capital formation will get a boost. As a result, production will go up further.

(b) Bad Effect: Public debt may also have an adverse affect on the production. It happens under the following conditions – (1) If public debt is used for unproductive activities, more taxes will have to be imposed so as to redeem this debt and the interest thereon. It will have a bad affect on production. (2) Public debt reduces the peoples tendency to work. On the one hand, when people begin to get specific income by investing money in public debt, their tendency to work decreases. Secondly, people have to pay large amounts of money as taxes for the redemption of public debt and its interest, it has an adverse affect on their tendency to save. (3) The prices of commodities go up during the days of war. Therefore, whatever public debt is taken has a lesser real value. But prices go down after war. Taxes are imposed in order to redeem the public debt. Whatever sacrifice people have to make in the form of these taxes has a higher real value because the real value of currency increases owing to the low prices.

(2) Effects on Distribution: Public debt also affects the distribution of income in the country. If the distribution of income, as a result of the public debt, takes place from the rich class to the poor class, this distribution of public debt will be considered good. On the other side, if the distribution of income takes place from the poor class to the affluent class, the public debt will have an adverse affect.

(a) Good Effect: Public debt may have a good effect on the distribution in the following conditions- (1) If the public debt is used for productive activities, it will provide employment to the weaker section of the society. There will be an increase in their income, and the disparity or inequality of income in the country will decrease. They will also not have to bear the burden of the debt redemption because this redemption will be possible out of the increased production. (2) If public debt is secured in the form of small savings, postal savings and saving bank accounts, etc., it will benefit the weaker section of the society more.

(b) Bad Effect: Normally, inequality in the distribution of income increases by public debt. Public debt has bad affects on the distribution of income for the following reasons:

(1) Public debt is mostly taken from the affluent class of the country. The repayment of these debts and payment of interest thereon are made to this very class. If public deb’s are used for unproductive purposes, much of the burden of taxes imposed for these debts will have to be borne by the poor class. As a result, the inequality in the distribution of the country’s income will increase.

(2) Owing to the public debts, an affluent class comes into being in the country which will make the income obtained by virtue of these debts as the means of their livelihood. Thus, such people will go on becoming richer due to the public debt, but this class will not have any active part in the country’s production. This will increase the inequality of the distribution of wealth.

(3) Effects on Consumption : Public debt has two kinds of effect on the consumption also- (1) Good Effect: As a result of the public debt, increase in consumpdon may take place. It happens so when people give public debt out of their saving. Production in the country increases by this debt; supply of consumer goods increases, resulting in the increase in consumption.

(2) Bad Effect: If public debt is utilized for unproductive purposes, additional taxes will have to be imposed for the redemption of this debt, resulting in a fall in consumption, too. Besides it, when the public reduces its existing consumption in order to invest money in the public debt, it also has a bad effect on consumption.

(4) Effects on Inflation and Deflation: Public debt has an effect also on inflation and deflation. According to Lord Keynes, “Prices of commodities keep on increasing during the period of inflation.” If the government sells public debentures in order to check these spiralling prices, the amount of money with the public will decrease, and demand will be low, resulting in a fall in prices. On the other hand, if there is a state of deflation in the country, the government should repay the loans obtained from the public but it should secure loans from the central bank of the country and also from other banks. The quantum of credit will increase by this method, and deficit financing will become possible. As a result, increase in the government expenditure will take place, extent of employment will go up, and it will be possible to remove the state of economic depression in the country.

(5) Economic Development and External Debt: External public debt enables a developing country to secure capital and technology which it cannot get internally and which are so essential for economic development. But it should be remembered that the total burden of a foreign loan is higher than that of an internal loan of equal extent. Therefore external debt should be taken only when there are adequate chances for their repayment.