Public Debt | Meaning and Causes

What is Public Debt?

Public Debt is defined as a debt collected by the government from its citizens or from foreign countries. The government can take debts from various sources such as banks, financial institutions, business institutions, or foreign banks. The government borrows such public debt for many reasons, such as the revenue generated is not sufficient for the expenditure in various public-related facilities and works. The government can borrow money for short-term, medium-term, or long-term. For short-term, these debts are generally in the form of treasury bills or bonds, and for these debts, the government has to pay interest at a stipulated interest rate regularly, or a lump sum amount at the end of the stipulated period. Maintaining public debt is a complex and challenging task; therefore, some rules and regulations are made and followed.

According to Philip E. Taylor, “The debt is in the form of promises by the treasury to pay the holders of these promises a principal sum and in most cases interest on that principal.”

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.”

Causes of Increase in Public Debt

In today’s modern age, the public debt has been increasing rapidly. If the proper balance and maintenance is not done for the previous public debts it results in unorganised and unstable economic conditions. The causes of the increase in public debt are given below:

1. Developmental Planning

Developmental Planning is a process in which various strategies, programs, and policies are performed for the development of the citizens and country to improve the economic conditions. Developmental planning consists of building infrastructure, creating employment opportunities, healthcare facilities, and educational institutions. For the development of such facilities, the required initial investment as well as the overall cost is high. Due to their low taxable capacity, developing countries use internal and external borrowings for the financial development of the economy. Besides, the developed countries also use borrowings to finance the construction work of buildings, houses, irrigation works, etc. 

For example, the Government takes public debt for providing flat systems to the people. Such schemes are provided for people who don’t have a house to live in or cannot afford it.

2. Unpopularity of Taxation

Paying taxes plays a very important role in various public services and government-related operations. These taxes are paid by every individual from their income. Therefore many people with less income do not consider it as their responsibility. Even the complex structure of government does not help to identify how and for what purpose the taxes are being used by the government. Even the government may provide uneven charges for every individual. Therefore, due to such unpopularity of taxation in public many times government needs to borrow public debt.

For example, Illiterate citizens with less income avoid paying taxes. This happens because they have very little income or they are not aware of the importance of paying taxes to the government.

3. Facing Natural Calamities

Natural calamities such as floods, earthquakes, and volcanic eruptions occur and create a lot of damage. This leads to unstable environmental as well as economic balance. Many people lose their jobs, homes, and lands. Recovering from such disasters requires more money and time. The government needs to provide such victims with housing, food, safety, and employment facilities. Therefore, the government takes public debt from the people, which will help to manage the loss and improve the economy of the country.

For example, Providing food, employment, and home facilities for flood victims. More amount is required to provide all the facilities to the victims of natural calamities.

4. Waging Wars

The rise of new wars is also one of the major causes of increasing public debt by the government. In war, finance and major investment are required for weapons, including nuclear weapons. For the security of the soldiers; weapons, safety gadgets, and food a heavy budget is required. Besides, after their retirement or death, the families are provided with government pensions. Most of the revenue of government is required in war, which reduces their economic balance and thus raises a need to take public debt. Thus, the public debt fills up the gap between the revenue generated and the investment done for war.

For example, the Government needs more money for nuclear weapons and battle tanks during war.

5. Covering the Temporary Deficit in the Budget

Many times governments face the problem of temporary deficits in their budgets. Therefore, the government needs to find the shortcomings between its revenue and expenditures. If the government does not make appropriate plans and actions on them, many a time they face various issues and have to borrow money from the public, increasing public debt. Borrowing public debt can provide relief for a small amount of time, but the interest they need to pay goes on increasing. 

For example, the Government takes public debt to return the loan that was taken in the previous year from financial institutions.

6. Dealing with Depression

The causes of depression for the governments include economic, financial, and environmental factors. Such depression can affect the expenditure and savings of the government and increase the rate of public debt. Due to natural calamities, the government needs more expenditure for the victims as well as for other environmental losses. The next factor that occurs is less tax revenue from the citizens. If citizens are also facing financial and economic issues, they are not ready to pay specified tax amounts. An increase in government expenses, such as employment facilities, and government projects leads to more expenditure and results in public debts.

For example, Due to the continuously rising population and facing natural calamities such as less rainfall, the government has to deal with depression, and to recover from such situations has to borrow money from the public.

7. Controlling Inflation

For controlling inflation the need for public debt arises. During the time of inflation, the value of money decreases. Therefore to complete the expenses government has to borrow a large amount of money from various sources. During inflation even the value of interest rate increases due to which even borrowing the public debt becomes more expensive for the government. During inflation, even the economic conditions of the country and the value of currency are also affected very badly. Therefore to cover all the issues and maintain the economy, the government takes public debts from various sources.

For example, During a recession in the IT industry, educated professionals lose their jobs and the financial condition of the country is also affected. The government, in such a case, will need money to create new infrastructure and employment opportunities for which it has to take public debt.