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
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
(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
(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.