Burden of Public Debt | Burden of Public debt Meaning

Hello friends, in today’s article we are going to know about the burden of public debt meaning. So let’s discuss in details.

Burden of Public debt Meaning

According to earlier economist due to public debt, much borrowing would lead to state bankruptcy. According to the post Keynesian economist it is a fiscal instrument capable of achieving economic benefits instead of harming the society.

Burden of public debt is discussed into two part- (1) Internal public debt and the burden and (2) External Public debt and the burden.

Internal public debt and the burden

(i) The public debt may impose a net burden on the state since the tax-payers bearing the responsibility of paying interest and repaying principal undergo and amount of hardship and since the amount of benefit or satisfaction accruing to the bond holders when they receive interest and repayment of principal may not fully compensate the loss of taxpayer’s satisfaction.

(ii) The true nature of burden of the internal debt, however, depends on how the burden of debt is defined.

Now, if the burden is defined as loss of economic resources, internally held public debt does impose any burden because the resources remain within the country at the time of their diversion either from bondholder to government at the time of creasing debt or from taxpayers to bond holders at the time of its liquidation.

If the burden of public debt is sought to be measured in terms of economic stresses and strains due to raising of additional tax to service the debt, taxes may tend to dampen incentives to bear risk, to innovate, to invest and to work.

Thus the existence of a large debt can impair economic growth. Even if the bondholders are made to pay the same amount of tax as they would receive payment of interest due to them, there will be a burden of public debt in the form of frustration of the bondholders.

(iii) If the burden is viewed in terms of reduction of income equality internally held public borrowing does impose a burden on the society.

Bond holders are generally richer classes while tax payers belong to both the rich and the poor. In underdeveloped countries, the largest section of taxpayers belong to the poor classes.

Thus, interest payment and repayment of public debt divert resources from the poor tax payers to the rich bondholders. This inevitably increases the inequality of income in the society.

(iv) In so far as public debt helps increasing inflationary pressure in the society, it has a definite burden attached to it. Income effect of bondholders is positive because the possession of bonds makes them feel richer.

Inflation is not only harmful for the poorer sections because of the rise in prices but it adds to the relative poverty though increasing inequality of income.

(v) Professor Domar defines burden of public debt as the ratio of total debt to total national income. Thus, if the national income does not increase but public debt increases, the burden will rise.

When national income increases, the taxpaying capacity of the country increases and if the public borrowing also increases but a bit less rapidly, then the burden will decline even with increasing public borrowing.

(vi) If the project is financed by borrowings, the present generation does not bear the cost and, hence, the burden of borrowing is shifted to future generation which has to pay taxes to pay interest and repay the debt.

Thus we have got that there is no money burden of the internally held public borrowing because the money involved in the public borrowing is diverted from one section of people to another and, hence, remains in the society itself.

However, there is a real burden of public borrowing. We have already observed that bondholders are generally richer people and tax payers are poorer. Hence, there is a diversion of resources from the poor to the rich and, hence, is inequality of income increased.

Moreover, the taxpayer’s ability to work, save and invest may be reduced due to heavy taxation. This will retard production and will impose a real burden on the community.

External Public Debt and the Burden

The burden on the country with respect to external public debt is very much different from the burden of internal public debt. External public debt imposes both money burden and real burden on the community.

(i) When external debt is to be repaid and serviced, the payment has to be made in creditor’s currency. The foreign exchange has, therefore, to be earned through excess of exports over imports.

This means that the amount of goods and services are lost from the nation. This will reduce the real income and, hence, will reduce its welfare. This is a real burden on the community.

(ii) Thus, utmost care has to be taken in borrowing from the foreign countries. Whether the external debt is harmful or beneficial to the debtor country is decided by the nature of utilization of the debt.

If the borrowing is utilized for setting up of those capital assets that will directly enhance the production and productivity so that the borrowing servicing and repayment of borrowing can be made from the income earned from these assets, then public borrowing instead of imposing a burden will improve the conditions of country.

Therefore, the size and nature of external public debt has to be carefully considered. In many developing countries, the magnitude of foreign debt has reached that extent which has almost put them into what is called debt trap.

Debt trap refers to such situation under which the nation is unable to service the debt without incurring additional debts. Thus, old debt obligations have to be met from new debt obligations. This is a serious situation about which a nation should always remain careful.

Conclusion

So friends, this was the burden of public debt on Indian economy. Hope you get the full details about it and hope you like this article.

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