What is the Public Debt ? Describe the classification of public debt.

Classify Public Debt and state the objects for which public debt is incurred.

Ans.

Meaning of Public Debt

In the economic literature there is a hot discussion on the question of public debt. Infact, public debt is an instrument of fiscal policy of recent origin. Classical economists were not in favour of deficit budget and thus, of public debt. After the publication of “The General Theory of Employment Interest and Money” in 1936 by J.M. Keynes, the importance of deficit financing and thus, for public debt for economic development has increased. Since then almost every country of the world started to spend more than the revenue collected for their economic development.

In recent times public expenditure of each and every country has undergone a sea change. The short fall of expenditure and revenue is met by incurring loans. Debt incurred by the government from different sources to meet its excess expenditure is known as public debt. It refers to all types of borrowings made by the government.

According to Prof. Taylor, “Government debt arises out of borrowing by the treasury from banks, business organisations and individuals.”

In the words of Findley Shirras, “National debt is a debt which a state owes to its subjects or the nationals of other countries.”

Classification of Public Debt or Forms of Public Debt

(1) According to Period

Every debt is taken for a specific period. The classification of public debts can be made in the following parts, according to period-

(1) Short term Debts: The loans which government services for a period upto one year are called short term loans (Short Period Loans). The main reason behind these short period loans is that the taxes imposed by the government are collected during the last two or three months of the year, but the government expenditure is made continuously. In order to meet this expenditure the government takes loans for a period ranging from 3 to 6 months or a year. These loans may also be called Ways and Means Advances. The government sells Treasury Bills for securing these loans. After a specific period, payment of these Bills is made. Short period loan is also called temporary loan and it is obtained to meet contingencies. Low rate of interest is paid on these loans. The major drawback of these loans is that they have become regular. Whenever a loan is paid back, another fresh loan is sought. Thus, extra-vagance gets encouraged.

(2) Long Period Debts: These debts are taken for a period exceeding ten years. These debts are utilized for public works such as, irrigation, means of transport and for the construction of mulf purpose projects. These debts are also utilized for setting up heavy industries. These debts have a great significance for the economic development of the country. The burden of these debts falls on the future generation. Their benefit also goes to that generation. So, these debts are considered good from the point of view of justice.

(3) Funded or Irredeemable Debts : When the government is not bound to pay back the capital amount of any debt, such a debt is called as funded or irredeemable debt. Arrangement is made for the regular payment of interest on such debts. Those debts also fall in this category the payment of which is made over a very long period.

(4) Unfunded or Redeemable Debts: Unfunded debts are those debts the capital amount and the interest of which have to be paid back by the government by a due date. The government is committed to do so.

(II) According to Use: The classification of the public debt, according to use, can be made in two parts-

(1) Productive Debts : Productive debts are those debts which are used for productive activities. The amount obtained from these debts can be spent on the establishment of industries, provision of irrigation facilities, construction of multipurpose projects and means of transport. The revenue earned from the capital formation through these debts, is itself used for the redemption of these debts. These debts have a great importance for the economic development and capital formation of each country. Mrs. Ursula Hicks has termed these debts as Active Debts. These debts play an active role in increasing the country’s production.

(2) Unproductive Debts : Unproductive debts are those debts the spending of which neither yields income nor increases the production capacity. These debts are spent on famines, floods, natural calamities and wars, etc. Mrs. Hicks has called these as Dead Weight Debts Or Passive Loans. The burden of these debts falls on the entire economy.

(III) According to Nature: The classification of public debts, according to their nature, can be made in two parts-

(1) Voluntary Debts: The public gives these debts to the government out of its own free will. The government makes the redemption of these debts along with the interest thereon as per the terms of the debts. These debts are very popular. These debts can be secured both within the country and from the foreign countries.

(2) Forced or Involuntary or Compulsory Debts : In a state of aggression or emergency, the government can force people to give loans. People do not give these loans voluntarily. That is why these debts are called involuntary debts. The Compulsory Saving Scheme started in India is an example of the involuntary debts. These debts are not popular. The public opposes these loans.

According to Dalton, “A compulsory or a forced loan is a rarity in modem public finance since it combines the disadvantages, while lacking the advantages of both tax and voluntary loan.”

(IV) According to the Sources of the Loans : According to the sources of the loans, these can be divided into two parts-

(1) Domestic or Internal Debts : Domestic debts are the debts which can be secured within the country from the public or from the financial institutions like banks, etc. These are secured in the currency of the country. The repayment of the capital and payment of interest is made in the currency of the country. These debts prove helpful not only in the development of the country, but they help in the equitable distribution of income in the country. The saving of the affluent class can be mobilised by these debts, and that amount can be spent for the welfare of the poor class. But internal debts cannot meet the entire demand of the economic development of the country. So, debts have to be secured from the foreign countries as well.

(2) External or Foreign Debts: The debts secured from the foreign and international institutions are termed as external debts. These debts are received in foreign exchange. Normally, the repayment of the capital and payment of interest is also made in the foreign exchange. Foreign debts have a great importance for an underdeveloped country, (a) External debts meet the deficiency of capital in the country, (b) External debt fetches foreign exchange by which a country can correct imbalance of its foreign trade and can import the required machinery and raw materials, etc., for the economic development of the country, (c) Along with the external debts, technical know how is also obtained. By this know how, the industrial development of the country is accelerated. External debts should be used carefully. There are several demerits, too; of these debts: (i) Sometimes, a country becomes over dependent on external debts. The foreign creditors start interfering with the political and economic policies of the country. This endangers the freedom of the country, (ii) Alongwith the debt, the nationals of creditor nations also begin to arrive in the country. They have to be employed on high salaries and perks. They also pass on the national secrets to other countries, (iii) There is drain of capital from the country in the form of high rate of interest on foreign loans.

(V) Marketable and Non Marketable Debt: The distinction between marketable and non marketable public debt lies with the negotiability of government loans between interest bearing and non interest bearing loans. In case of marketable debt securities are negotiable in the open market whereas in case of non marketable debt securities cannot be sold in the stock exchange market.

(VI) Gross and Net Debt: Gross debt consists of the total amount of debt outstanding at any time whereas net debt is the balance amount of gross debt minus sinking fund or other assets earnmarked for repayment of debt.