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After reading this article you will learn about the burden of public debt.

Burden of public debt is a misleading and highly confused concept. The 1930’s and 1940’s witnessed an array of debate over the issue of debt burden. The focus of debate was between those who feared that the creation of debt in course of deficit finance would burden the future and others who believed that such finance would not do so.

Later on two extreme views emerged in this regard. The burden controversy attained its logical end in the pronouncement of A.C. Pigou, A.P. Lerner, Alwin. H. Hansen and Prof. P.E. Taylor.

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In this context, Prof. Taylor point out that “the nature and severity of the burden have however frequently been improperly understood largely because of the temptation to think of public debt in terms of private debt and to apply identical standards to both”.

Moreover, while discussing the burden of public debt, we have to bear in mind not only the amount of debt but also the corresponding credit. As A.P. Lerner point out “the great misconception lies in looking at only one side of debt-credit relationship.

Every debt has a corresponding credit and this fact is frequently over looked when considering the burden of public debt. In this context, Taylor point out “the liability of the debtor to the creditor is matched by the asset value of the creditors claim.

This is a routine fact which is frequently over looked when considering the nature of debt”. The views of these economists remained unchanged for quite a long time. The Keynesian approach disagreed with the classical burden thesis.

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The Keynesian approach strongly advocates that public borrowing for the purpose of generating effective demand will not generate any burden. It will help to activate idle savings in the private sector and generate income and employment. However, with the publication of James Buchana’s “Public Principles of Public Debt” in 1958, the debt burden controversy got again activated and fueled.

1. Traditional Views on the Burden of Public Debt:

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The traditional view is that public debt as in the case of private debt imposes a real burden on the community. The classical view maintains that if the government expenditure is financed through taxation the present generation bears the burden. But if government expenditure is financed through public borrowing, the present generation gets relieved from the cost and burden is shifted to the future generation.

The future generation suffers when present generation reduces its saving in-order to meet the debt finance and leave a smaller amount of capital resources for the future. This will reduce the productive capacity of the future generation and accordingly they will stand to lose.

In a sense, war finance through public debt has double effect. For example, in-order to contribute to war finance, the present generation has either to curtail its consumption or saving or both. If savings are reduced the future generation suffers on account of reduced inherited capital.

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On the other-hand, if the present generation does not reduce its consumption, burden of public debt may pass on to the future generation. This view is held by David Hume, Adam Smith and David Ricardo.

According to the classists public debt necessitate a transfer of resources from the private sector to the government in the form of additional taxation. Secondly, the classist held the view that public debt is a more costly method of financing public expenditure than taxation.

This is so because interest payment is an additional cost burden in the case of public debt. Thirdly as stated earlier, public debt tends to transfer the burden of a particular outlay to the future generation.

Moreover, excess borrowing and mounting public debt of the government may undermine the very creditworthiness of the government. Hence the traditional economists strongly argued that public debt should be kept to the minimum and should be redeemed as early as possible.

2. Modern Views:

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Economists like J.M. Keynes, Harris, Buchanan, Musgrave, and Modigliani are the chief exponents of the modern version of debt burden. The modem theory of public debt is put as “the new orthodoxy” by Prof. Buchanan.

The worldwide depression of 1930’s and the emergence of Keynesian economics paved the way for the development of the new theory of public debt. The new theory is diametrically opposed to the classical concept of public debt. Modern theory firmly advocates that large volume of public debt is a national asset rather than a liability. This theory recognizes that persistent deficit spending is a tonic to the economic development of nations.

During periods of depression, the technique of deficit budget financed through borrowing can be fruitfully utilized to improve employment situation and generating effective demand and thereby raising the level of economic activity.

Under the shadow of Says Law, propagated the misconception that persistent technique of unbalancing the budget coupled with increasing proportion of public debt endangers the very economic stability of the nation.

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However, the modern theories strongly believe that public expenditure is not at all wasteful. To them, public expenditure can be made productive and an important means to increase employment in the economy.

As a corollary to this concept, Prof. A.H. Hansen, the chief advocate of modern theory states that public debt is an essential means of increasing employment and it has become an instrument of modern economic policy of nations.

Prof. James Buchanan in his book “Public principles of public debt”, states that debt burden implies a compulsory sacrifice. He argued that the primary burden of the internally held public debt is always in the future.

Buchanan held the view that burden of debt should be considered in terms of reduction in personal satisfaction. When a public debt is floated, the lenders voluntarily purchase bonds. There is no loss of satisfaction in the process of exchanging more liquid money for less liquid bonds. Here people prefer government bonds as a good form of investment.

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Buchanan argues that when government debt is serviced there is a burden in the form of claim on the taxpayer’s income. That is when the debt is repaid; the future generation has to pay tax. This will reduce either their consumption or saving.

This will lead to reduced satisfaction. Hence, the primary burden is shifted to the future generation. This view of Prof. James Buchanan was widely supported by a number of economists. The conclusions emerging from the forgone analysis can be summarized as follows. The existence of large debt is neither a blessing nor an evil. It produces both favourable and adverse effect on the economy.

Public debt should be treated as an important instrument of fiscal policy. Both these conflicting views on the burden of public debt can be easily shown to be misleading. Hence

Difference Between Money Burden And Real Burden