Effects of Public Debt

3. Positive
Effects of
Public Debt

4. 1.Mobilization of resources:
With the help of borrowing govt. can easily
make various types of plans to mobilize the
resources efficiently to finance various
projects.
2 .Increase in the productive
capacity:
Borrowing is very much helpful in using
capital intensive techniques to increase the
productive capacity of a country.

5. 3. Promotion of Investments:
 - Public borrowing helps in promoting
investments. Borrowed fund can be utilized
for strengthening social and economic
infrastructure.
4. Financing of Developmental
expenditure: -
 Borrowing can be used to meet the
developmental expenditure like roads,
communication system, railways telecom,
finance etc.

6. 5. Obtaining foreign exchange:-
For development purpose govt. tries
to acquire money capital, raw
material from foreign countries.
It can then only be possible if we
have good stock of foreign
exchanges with us.

7. Effects on Consumption:
 When people subscribe to government
loans, they generally have to curtail
consumption.
Since investment of funds raised by
borrowing raises the level of
employment and as a result raises the
level of consumption.

8. Effects on Distribution:
 Public loans transfer money from rich to
government.
 The fiscal operations of the government
are to benefit the poor primarily.
 The income of the poor increase directly
through increased employment or it
benefits them in directly through the
enlargement of social services.

9. Effects on the Level of
Income and Employment:
 In modern times, public borrowing is
resorted to in order to raise funds for
financing agriculture, industry, mining,
transportation, communication, etc.
 It increases employment opportunities,
the level of income and standard of living.

10. Adverse
Effects of
Public Debt

11. Inflationary impact:
 Whether public borrowing is Inflationary or
anti- inflationary depends on how the debt
affects the money supply and how it affects
economic activity.
 Loans from banks (say purchase of government
bonds by commercial banks) lead to an
increase in money supply. This will put a great
pressure on the price level. In this
sense, ‘borrowing is inflationary’.

 However, if public debt is used to raise
income, employment and output, the
inflationary effect will then be greatly
minimized.

12.  2. Additional tax burden:
To repay the old loans, Government has to
impose new taxes on people which will be
extra tax burden on the people and it
pinches a lot.
 3. Adverse effect on saving and
investment:
 For the repayment of loan when govt.
imposes new taxes on the people there will
be adverse effect on saving and investment

13. 4) Effects on distribution of income:
 If loans are raised to finance unproductive
activities like repayment of loans, resources
then may not be allocated in an optimal manner
 As far as loan repayment is concerned,
government levies taxes whose burdens are felt
more or less by all—both rich and poor. However,
burden of taxes is mostly felt by the poor
people.
 Rich people who lend money to the government
earn more interest income than what they
sacrifice by paying taxes. Hence inequality
widens.

14. 5) Unproductive debt:
Apart of the loan taken by the govt. is used
to meet the non developmental
expenditure which never helps in
increasing the production in the country.
Thus it is called dead weight debt which is
very difficult to repay.
6) Debt servicing burden:
The annual interest paid by the govt. in lieu
of debt increase is known as debt servicing
burden.
There is very large increase in debt servicing
burden in every country in modern times
which has very dangerous consequences.