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Home National Debt and Income Determination Burden of National Debt

 

Burden of National Debt:

 

The classical economists were of the view that every government should balance its own budget. Balancing of the annual budget was considered to be a great virtue by them. If at any time, the expenditure of the state exceeded its income and the deficit was met by borrowing from within the country or from outside, it was considered to be a sign of bankruptcy and downfall of the state. So the classical economist disfavored the scheme of borrowing either from within or from other countries.

 

The modern economists, however, hold a different view. They are of the opinion that if loans are taken for productive purposes, i.e., for increasing income, output and employment in the country, they are justified in every respect. They regard loans as regrettable necessity. All the developing countries of the world today are depending upon internal and external loans for accelerating the rate of economic development. A backward country intact cannot come out of the vicious circle of under development unless the stock of capital is increased by increasing investment expenditure.

 

Why Public Loans are Raised?

 

The government too like an individual desires to live within its means and disfavors to be under debt. But sometimes occasions arise when state is forced to get loans. These occasions are as follows:

 

(i) If there arises a deficiency in aggregate demand and income, output and employment are falling rapidly, the state raises loans for investment expenditure and fills up the deflationary gap.

 

(ii) If the state faces any calamity such as flood, earthquake, draught, etc., it cannot meet these emergencies out of the normal receipts. So the state has to borrow funds.

 

(iii) If the country has to wage a war for a short or for a long period or there is internal, disorder in the country leading to economic instability, the money has to be borrowed on a large scale in order to meet deficit in the budget.

 

(iv) If the rate of economic development is to be accelerated, investment expenditure has to be met by borrowing money.

 

Burden of National Debt:

 

The burden of the national debt can be judged from the purpose of the loan. If the state raised loan for the purchase of some real assets or for the extension of productive undertakings, then there will not be any real or money burden on the nation. But if there are no assets to balance the loan, then the community will have to bear both the money and real burden of the debt. How much the nation will bear the burden depends on whether it is external debt or an internal debt.

 

(i) External Debt:

 

In case of an external debt, money in the form of goods and services is transferred from the debtor country to the creditor country. The direct money burden of an external debt is measured by the total sum of money payments to the creditor. The direct real burden, however, consists in the loss of economic welfare which a debtor country has to bear. If the payments which are made in the form of goods and services are borne mainly by the rich people, then the direct real burden on the nation is small. If the burden of making payment falls more on the poor people, then the direct real burden is quite large.

 

The indirect money or real burden of the foreign debt lies in the check to the productive power of the community. First, by the export of the goods and services and secondly, by imposing a check to public expenditure which might have proved both productive in some other direction.

 

(ii) Internal Debt:

 

In case of internal debt, there is no direct money burden because the debtors and the creditors remain in the same country. The state obtains loan from its own citizens and other institutions like banks, insurance companies, etc., situated in the country and pays the loan back in due course of time. The payment made by the debtor to the creditor in same country are thus merely transfer payments and so cause less money burden on the community.

 

The direct and real burden of the internal loan may be quite considerable. If for the payment of loan, the government taxes the people in such a way that the inequality of income is reduced In the country, it then confers a direct real benefit. If, on the other hand, the burden of taxation falls more on the poor people than on the rich and the gulf between the rich and the poor further widens, then it imposes a real burden on the community. In the words of Dalton:

 

"There will be a direct real burden if the proportion of taxation paid by the rich is smaller than the portion of public securities held by them. There will be a direct real benefit if it is larger".

 

The indirect real burden of the internal loans depends upon the effect of taxation on the tax-payer's ability and desire to work and save. If government levies heavy taxes for the repayment of loans, then the people's desire to work and save is adversely affected. People work less efficiently, their standard of living falls. There also results a decrease in production and employment both in consumer's as well as in capital goods industries.

Relevant Articles:

What is Federal Budget
What is National Debt
Classification/Types/Categories of National Debt
Short Term Loans
Long Term Loans
Methods of State Borrowing
Methods of Paying Public Debt
Burden of National Debt
National Debt and Economic Stability
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance

History of Money
 

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