What is the importance of Public Debt?
What is the importance of Public Debt?
Or
Why does Government incur Public Debt? Explain in detail.
Ans.
Importance or Significance of Public Debt
The Classical economists believed in the policy of Balanced Budget. They did not consider 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 –
(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.
(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 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 this purpose, capital is needed. Public debt is an important means of securing capital for investment.
(3) Social Welfare: Modern economists believe that human capital is very important for the economic development of a 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.
(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.
(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 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 money with the public goes down. Thus, public debts are secured for the effective implementation of economic stabilisation, too.
(6) Safeguard Against Depression: According to Lord 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 thus, and greater stability will be achieved Public debt is a significant means of removing unemployment.
(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 had by taxes, Here, the taxation system lacks flexibility and productivity. Public opposes 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 gets a boost. In the underdeveloped countries, there is a limit to mobilize resources through taxation, Thus, the importance of public debt has increased.
(8) To Bridge Temporary Deficit : The government also secures loans in order to bridge the temporary budget deficit. It is so because the taxes do not yield income quickly, and people, too, oppose temporary taxes.
(9) Establishment of Public Enterprises : The government takes big loans for the establishment of public enterprises also. The government may have to nationalize the private sector for various reasons, or may have to take over the sick units. For the financing of these activities, loans are taken.What is the importance of Public Debt?
