There are periods when a government is not able to meet its expenditure from the tax receipts. It then takes recourse to borrowing. The loans which are payable within a year, are termed as short term loans.
Reasons or Causes:
(i) If at any time, total expenditure of the government exceeds its revenue, then it takes recourse to short term borrowing.
(ii) If, at any time, the rate of interest in the market is very high and the government is in need of large amounts of money to finance its various projects, then it raises loan for a short period only and waits till the prevailing high rate of interest comes down.
The commercial banks find a very safe and profitable opportunity to invest their surplus funds in the government short term loans.
(i) If a short term loan is taken at a lower rate of interest for paying off a debt raised at a higher rate, then it won’t produce any unhealthy repercussions. But if the short term debt is contracted for an unnecessary expenditure, then people lose faith in the financial stability of the country.
(ii) The commercial banks find treasury bills as the most safest and profitable form of investment, they divert their resources from trade and industry and invest their funds in treasury bills. The economic progress of the country is thus badly affected.
(iii) When a government is in debt, it becomes very difficult for her to get out of it. As one temporary loan matures, the government being unable to pay it issues another loan to pay off the first and this process continues for an indefinite period.
(iv) Another disadvantage of short term loan is that if at any time some emergency arises, then new loans in large amounts cannot be easily raised because the government is already under debt.