Incidence of Public Debt

What is Public Debt?

Public Debt can be defined as a loan taken by the government from its public and foreign countries as well. The government can take loans from its public, financial institutions, banks, business organisations, etc., and from foreign countries as well. Public debts are subject to a fixed interest and are repaid by the government to the creditors after the expiry of the stipulated period.

According to J.K. Mehta, “Public debt is a comparatively modern phenomenon and has come into existence with the development of democratic form of governments in the world.”

Incidence of Public Debt

As government, sometimes needs to borrow money from the public to invest in productive as well as unproductive operations. The borrowed money from the public is known as Public Debt. Public debt is classified into Internal Debt and External Debt. Internal Debt can be defined as money borrowed from inside the country from sources like citizens, the country’s banks, the country’s financial institutions, business houses, etc. External Debt can be defined as money borrowed from outside the country from sources like foreign governments, International Monetary Funds (IMF), Foreign Direct Investments (FDI), Foreign Portfolio Investments (FPI), etc.

I. Incidence of Internal Debt

1. Direct Money Burden: There is no/less money burden in case of internal debt. Mainly, the purchasing power gets transferred from one section to another. When lenders lend money to the government, the purchasing power gets transferred from the lenders to the government. Spending the borrowed amount for various purposes involves the transfer of purchasing power from the government to producers, contractors, workers, etc.

2. Indirect Money Burden: When the government spends the loan amounts on various development projects, this leads to the creation of demand for goods and services. High demand leads to a rise in prices, imposing additional money on society. Thus, creating an indirect money burden of internal debt.

3. Direct Real Burden: For the repayment purpose of internal debt, the government generally imposes taxes on people to collect some money. Here, the transfer of purchasing power happens from one section to another. Taxpayers are generally financially conscious people, and lenders are not conscious about their finances (lenders tend to live on their past accumulated wealth). So, funds, in the form of taxes, get transferred from financially conscious to non-conscious people, in the form of interest and repayment of the principal amount. Further, taxpayers comprise active sections, and creditors/lenders comprise inactive sections of society. Hence, it can be said that under internal debt, funds get transferred from the active and enterprising sections to inactive and non-enterprising sections.

4. Indirect Real Burden: As the government needs to levy additional taxes on the people to repay the public debt. As a result of this, the economic inequalities in the country expand, creating a widened gap between various sections of the society. Effecting the productive capacity of the people in the country, this burden affects the country to its core.

II. Incidence of External Debt

1. Direct Money Burden: In case of external debt, the debtor country needs to pay interest to the creditor country every year. On the maturity of debt tenure, the debtor country needs to repay the full principal amount to the creditor country. The direct money burden of the external debt is, thus, represented by the aggregate of money payments in the form of interest and the principal amount payable to the external creditors.

2. Indirect Money Burden: Sometimes, the debtor country pays the interest amount to the creditor country in the form of goods and/or services. The debtor country exports the country’s goods to the creditors against the interest instalment. This results in raised prices of corresponding goods and services; hence, declining the welfare of the community.

3. Direct Real Burden: The government often levies taxes on the people to collect some money for interest payment and repayment of the principal amount. These taxes affect poorer sections more as compared to the richer sections. The economic welfare of the poorer sections gets disturbed, showing the direct real burden of external debts.

4. Indirect Real Burden: The government often levies taxes on the people to collect some money for interest payment and repayment of the principal amount. Taxes put a financial burden on society affecting their capacity to work. This produces adverse effects on overall production, and the production capacity of the home country gets reduced, showing the indirect real burden of external debt.