There are periods when a government is not able to meet its expenditure from the tax receipts. It then takes recourse to borrowing. If the government is in need of large funds and the short term loans are not suitable and adequate, then it takes recourse to long term loans.
The main advantages claimed for long term loans are as follows:
(i) Long term loan provides an opportunity to the state to under-take large projects like constructions of canals, hydro-electric projects, buildings, highways, hospitals, etc. As these loans are not to be repaid at a short notice, so the government safely spends them on productive projects.
(ii) Long term loans are also unavoidable for preparing and fighting of a modern war.
(iii) The long term loans provide a very good opportunity for the commercial banks and the insurance companies to invest their surplus funds. As the rate of interest in long term loan is higher than on the short-term loan, therefore, they earn large profits.
(iv) Another merit of the long term loan is that it can be repaid by the government by the time which is favorable or convenient to it. It can also convert these loans at a lower rate of interest later on.
(v) If at any time the rate of interest is low, the government can contract a long-term loan and with the amount thus raised, some public works programs can be undertaken at a lesser cost.
(i) Long term loans are mostly incurred for financing war or for undertaking big public works program. If a country has to meet an external aggression, these long-term loans are unavoidable and so are justified. But if it wages a war to expand its territory, then they cannot be justified because there is very likelihood that the waging country may suffer losses. In such cases, the present generation as well as the posterity suffers.
(ii) In times of an emergency, the government has to undertake long-term loans even though they are at a higher rate of interest. The burden of the public debt is thus too much increased.
(iii) If a government embarks upon a big project by having a recourse to long term borrowing and miscarries it, then the future generation is burdened with a losing concern.
(iv) If the government has accumulated large capital through long-term loans and no real assets exists to pay off such debts, then it resorts to excessive taxation. Heavy taxation reduces the profits of the businessmen and discourages the new industrialists to take up new enterprises.
We cannot deny this fact that long-term loans have some disadvantages but when an emergency arises, they become absolutely unavoidable. The government should, however, see that they should be incurred mostly on those projects which give return so that the present generation as well as the posterity benefit from them.