9 Effect of Public Debt

Effect of Public Debt

These are effects of public debt which we discussed in detail below:

  1. Revenue Effect
  2. Expenditure Effect

Revenue Effect

When money is taken from the public by the medium of local debt then the people have to do changes in their budget. Whether it can be possible that Public debt doesn’t affect consumption- expenditure directly as taxation does because people use the saving of present and future to buy government securities.

But in some matters, it can be possible that the people try to increase their saving by reducing their waste expenditure to buy securities. It is clear that public debt affects consumption expenditure, this can be said the first effect of public debt.

Expenditure Effect

To spend the money on people collected by the public debts, the gain is to be given. This is the second effect of public debt. These gain are not different from those given by the expenditure of tax income – The thing is the collected money from debt is used in a similar way as the tax income are to be used.

But the fact is that to left some matters, the money collected from debt is always used differently as the tax revenue are to be used. But this difference is not always fast. For example, tax revenue can be used to give salary to the teachers then the amount of debt can be used to construct buildings of the school.

But the expenditure of taxation and debt proceeds whatever effects come, are mostly similar. But in some matters, we can see differences clearly. The consumption of amount taken from debt is used to arrange finance of capital nature, like the establishment for the production of atomic power.

But the proceeds of taxes are used to do financial management of current or revenue expenditure. It is clear that the first type of effect is different from the second type of effect.

Other Effects of Public Debt

We will discuss that what is the effect of public debt on consumption, production, distribution and non-governmental are following:

  1. Effect on Consumption
  2. Effect on Production
  3. Effect on Distribution
  4. Effect on Private Sector
  5. Effect on Cost of Production
  6. Effect on Employment
  7. Effect on Investment

Effect on Consumption

When people buy government securities then it is not important always that they do the credit of them from past savings. Sometimes people buy these securities from their present income whose usage they do on different things in other situations.

As they have offered to buy government bonds of less amount, so they buy bonds by leaving consumption of some things. For the financial arrangements of five-year plans in India, the saving plan is of the same nature. So because of the money invested in national plan certificates the people; present expenditure becomes low to such a level.

But, when people buy government securities from the money of their savings then they have a different effect. It doesn’t affect the present expenditure and it remains the same as before.

In this condition, the private non-government investment becomes ineffective but if this amount is credited from the amount saving in banks then it reduces the available money the banks have. In this situation, the banks have less money to give debt to private businesses so it affects the private investment.

Effect on Production

If people buy government securities by selling industrial organization’s share and debentures then it puts adverse effect the non-government investment, the net effect on investment depends upon that how the government use the money of public debt.

If the government use the money of public debt on governmental industries then it does not put an adverse effect on available investment for production. But, if the government invest it in unproductive work then some investment will definitely be affected.

Effect on Distribution

The buyers of government securities are mainly from the rich section. But to pay the interest on those debts whatever tax the government puts also affects the lower class. So, public debt increases imbalances in income. In this condition, it is clear that the public debt can’t put desirable effects on distribution.

If the bondholder and taxpayer both are the same then there is no redistribution of income and in this condition, there will be no increase in the imbalances of income. But normally it doesn’t prove right. So, if the bondholder and the taxpayer will be related to different sections.

There will be a little bit of redistribution of income and as it is already been said, there will be an increase in the imbalances of income. If public debt is used for the economic welfare of low-income groups then the inequalities of income reduce and there is a more equal distribution of income between different groups of society.

But, if inflation occurs due to the financial condition of debt, then the good effects of the distribution of income due to price-rise become fruitless. In this way, if the receivings of debts are spent on welfare plans, then it casts a favourable effect on the distribution.

Effect on Private Sector

Now, we will discuss that what are the effects of public debt on the private sector of the economy or non-government area. With each type of government expenditure, there is an increase in the quantity of purchasing power of people and more money comes into circulation.

So, there is an increase in the demand for things, when this expenditure fulfils the taxation, then the current consumption reduces, But when it is fulfilled by the borrowing then normally people use the extra saving to pay debts. As a result, there is no loss in current consumption. If the government uses the debited.

money to buy the things produced in private areas, then the demand for their things will definitely be increased at that point where the government spend this debited money for this work, by this extra taxation. However, it is possible that some part of borrowed money may be spent in giving wages to employees.

In this condition, officials can purchase produced goods in non-government areas. So, the effect of debited money may be such that the demand for produced goods of industries of the private or non-governmental areas may increase and there isn’t any adverse effect on supply. In this way, the effect of public debt on the non-governmental areas can be said favourably.

Effect on Cost of Production

Here, this will be right to discuss the effects of public debts on the cost of production. The cost of production depends upon the cost of raw material and the other factors of production.

It can be possible government may use the money taken as a debt to provide raw material at combined rates to the manufactures and to provide the services of transport and training. Government can also use this money for industrial research and can use it to provide materials to private industries.

Effect on Employment

In the time of depression, the cost, consumption and production fall down. In this condition, the government collects money from the securities on the basis of centralization and spends on those works that increase the employment and laxity of business become the end.

Effect on Investment

Normally, there is an unfavourable effect of public debts on investment. If government get debt from the banks purchasing this extra power will come in the public and there is no reduction in the amount of investment.

But if the money for debts is taken from the private savings or business then by this the investment will reduce. If the rate of interest is stable and there is no special attraction then there is a minimum possibility of reduction in private investment.

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