Public Debt: Concept
J.L.Hansen, “Public debt is the debt owned by a government to people and institutions within its own borders and/or to foreign creditors.”
Philip E. Taylor, "Government debt arises out of borrowing by the treasury from banks, business organizations and individuals. The debt is in the form of promises by the treasury to pay back the holders of these promises a principal sum and interest on the principal."
Need for Public Debt
- To manage current budget deficit: Governments do not have large accumulated reserves or cash balances to meet any current budget deficits. Normally, it is said that the regular expenditure should be financed from revenue sources. But due to many reasons sometimes income from revenue sources may not be sufficient to meet even the regular expenditure as required. Besides, the unexpected emergencies like fire, floods, famines earthquakes and other natural disasters necessitates a large amount of government expenditure for rescue and relief works. In such situation governments are compelled to borrow.
- To meet war expenses: Borrowing to finance wars is in practice since ancient times. In modern times, the cost of warfare has been tremendously increased with the development in war technology and techniques. In a situation of war, income from revenue sources will not be sufficient to meet war expenses. Besides, in such situation, economic activities generally decreases leading to low level of national income and low yield from taxation sources. In such situation it is not desirable to increase rate of taxes beyond desirable limits which may create serious socio-economic and even political problems in the country. So, it is better and convenient for government to borrow in a warfare situation.
- To maintain economic stability: The idea of compensatory finance and functional finance has recognized the importance of borrowings to maintain economic stability. In a situation of depression. Government is to increase its expenditure, mainly by borrowings, to increase effective demand in the economy. To control inflation, government is to borrow out of the peoples’ fund which is likely to be used for increasing consumption expenditure. At the same time, the borrowed money is to be invested on production of goods and services by itself or private sector, Besides, government may borrow from external sources to manage trade deficit.
- To promote the rate of economic growth: One of the main constraints in the process of economic growth in the developing countries is lack of sufficient investment resources. To exploit or utilize the potentiality of natural and human resources, it is necessary to make a significant investments on them. For this, the savings of individuals and private corporate bodies can be increased voluntarily by borrowings with attractive monetary benefits. Borrowing from banking and financial institutions including central bank, is needed for productive use of unused or idle resources. Besides, borrowing from external sources in a wise way and effective investments helps in increasing productive capacity of the economy and national production.
- To manage the problem of Balance of Payments: In a situation of deficit in the balance of payments, government may borrow from external sources for funding the import requirements.