Burden of Public Debt

The burden of public debt refers to the sacrifice imposed on the taxpayers with the increase in taxation to serve the debt, and the adverse effects on the economy as a whole (like reduction in capacity to consume, reduction in production of high quality goods and services by private sector, increase in price level, increase in inequality of income, inter-generation transfer of burden, outflow of national assets in case of foreign debt, etc.)

The burden is interpreted as financial or direct and real or indirect. Increase in tax level transfers some income of people to government, and the loss in income of people is the financial or direct burden. The other adverse effects on the economy, as mentioned above, are the real or indirect burden.

However the burden of public debt is determined by the facts as whether it is productive or unproductive / dead-weight debt, whether is internal or external, and the economic situation. Public debt for unproductive purposes is definitely a burden. But that for productive purposes may not be a burden if it is utilized in an effective way. Even the debt for productive purposes will have a burden in the form of increase in price level at least the gestation period. It is said that the internal debt will have no net financial burden to the economy as there will be just transfer on income within the economy. But, the external debt will be a burden as the debt repayment transfers national income to foreign creditors. The debt will not be a burden in a situation of recession or depression and even in an inflationary situation (if it is raised out of the income that is most likely to be used in more consumption). And also, in case of developing countries, the debt used for development purposes will not be a burden; rather it helps in mobilizing financial resources to exploit the un-utilized natural and human resources.

Burden of public debt is also interpreted with its effect as increasing inequality in income. This is why, mostly the holders of government securities are the middle and upper income class in the society and revenue for debt servicing is contributed by all groups in the developed countries and relatively more by the low income groups in the underdeveloped countries. 

The burden is also in the form of inflation. Borrowing from most of the sources, other than the individuals and private organizations, leads to increase in money supply and monetary income of people causing increase in demand. Along with this the government also increases demand. The combined effect will increase the total demand in the economy. But to improve the supply situation it takes certain time. So at least until the gestation period there will be inflation in the economy. 

There are controversial opinions regarding whether it will be a burden to the present generation or the future. On view argues that since the present generation will be deprived of the availability of goods and services as resources will be diverted towards government expenses, the present generation will bear the real burden. Whereas the future generation will bear the financial burden with increase in taxes for debt servicing.

No comments:

Post a Comment