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    Burden of Public Debt

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    Madhurima Mehendiratta
    The document discusses the burden of public debt, including: 1. The financial and real burdens that arise from increased taxation to pay interest on government loans. This includes lost income for citizens and potential negative economic effects. 2. Methods for estimating the burden, such as comparing debt to national wealth/income or debt service payments to total expenditures. 3. The modern theory introduced by Buchanan that challenges the view that public debt is always a burden, arguing that internal debt involves no burden and deficit spending can promote prosperity. 4. Buchanan's propositions that public debt does not necessarily burden future generations, the analogy between public and private debt is flawed, and internal/external debt differ in

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    Burden of Public Debt

    Uploaded by

    Madhurima Mehendiratta
    4K views13 pages
    The document discusses the burden of public debt, including: 1. The financial and real burdens that arise from increased taxation to pay interest on government loans. This includes lost income for citizens and potential negative economic effects. 2. Methods for estimating the burden, such as comparing debt to national wealth/income or debt service payments to total expenditures. 3. The modern theory introduced by Buchanan that challenges the view that public debt is always a burden, arguing that internal debt involves no burden and deficit spending can promote prosperity. 4. Buchanan's propositions that public debt does not necessarily burden future generations, the analogy between public and private debt is flawed, and internal/external debt differ in

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    The document discusses the burden of public debt, including: 1. The financial and real burdens that arise from increased taxation to pay interest on government loans. This includes lost income for citizens and potential negative economic effects. 2. Methods for estimating the burden, such as comparing debt to national wealth/income or debt service payments to total expenditures. 3. The modern theory introduced by Buchanan that challenges the view that public debt is always a burden, arguing that internal debt involves no burden and deficit spending can promote prosperity. 4. Buchanan's propositions that public debt does not necessarily burden future generations, the analogy between public and private debt is flawed, and internal/external debt differ in

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    4K views13 pages

    Burden of Public Debt

    Uploaded by

    Madhurima Mehendiratta
    The document discusses the burden of public debt, including: 1. The financial and real burdens that arise from increased taxation to pay interest on government loans. This includes lost income for citizens and potential negative economic effects. 2. Methods for estimating the burden, such as comparing debt to national wealth/income or debt service payments to total expenditures. 3. The modern theory introduced by Buchanan that challenges the view that public debt is always a burden, arguing that internal debt involves no burden and deficit spending can promote prosperity. 4. Buchanan's propositions that public debt does not necessarily burden future generations, the analogy between public and private debt is flawed, and internal/external debt differ in

    Copyright:

    Attribution Non-Commercial (BY-NC)
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    Download as ppt, pdf, or txt
    of 13

    BURDEN OF PUBLIC DEBT

    Burden of public debt refers to the sacrifice and the effects on the community through a rise in taxation at the time of repayment and for paying the annual interest on the govt loans. Distinction between financial burden and real burden

    Financial and Real burden


    Financial/primary burden : When a debt is incurred by the govt, the level of taxation has to be raised in order to meet the interest charges, and the income of the people are transferred to the govt. Such a loss in the income of the people are called the financial burden. Real/Secondary burden: The higher level of taxation caused by the rising public debt may have some repercussions on the economy in the form of adverse effects on the capacity and willingness to work and the capacity and willingness to save.

    Direct and Indirect burden


    Direct money burden and direct real burden Direct money burden is measured by the extent of money payment involved and the rise in taxation needed. Direct real burden : loss of economic welfare on account of the direct money burden of increased taxation. Indirect burden refers to the adverse effect of increased taxation on the level of production

    Estimation of Burden of Public Debt


    In estimating the burden of public debt it should be taken into account, whether the debt is productive or unproductive, and whether it is internal or external and also the price level in the economy. Burden of public debt is estimated in two ways : Ratio of national debt to national wealth and income The percentage of expenditure on the debt services to total expenditure.

    Modern Theory of the Burden of Public Debt


    Introduced by J.M.Buchanan Also called the The New Orthodoxy of Public debt. Offshoot of the economics of depression. Huge public debt is a national asset rather than a liability. Continuous deficit spending is essential to the economic prosperity of the nation.

    Internal public debt involves no burden since we own it to ourselves. External debt is regarded as a burden since repayment involves a transfer of real goods and services from the debtor country to the creditor country.

    Propositions of Modern Theory


    Buchanan in this book Public Principles of Public Debt gave three main propositions: 1) The creation of public debt does not involve any transfer of the primary real burden to future generations. The burden of govt borrowing and spending activity falls during the period in which it is created and it is the real sacrifice on the initial generation.

    The burden of public debt incurred now leaves not only an obligation to the future generation but also a claim. The tax payer children inherit tax liability and the bond holder children acquire an equal asset. The loss of tax payers is offset by the gains of the bond holders and therefore, for the economy as a whole the net burden will be nil.

    2) The analogy between public debt and private debt is fallatious. Prof.A.H.Hansen, the analogy between the public and private economies leads to quite erroneous conclusions. Classical economists both public and private economies strive to maximise their income. For the individual , he has to keep his expenditure within the limits of his income . For the state, an increase of expenditure may increase the total income and improve its fiscal position.

    3) The internal public debt and external public debt are fundamentally different in their impact. Servicing external debt results in transfer of resources from the domestic economy to the foreigners which means a net loss to the whole economy. To the extent of transfer of resources, the real income of the future generations is reduced.

    The existence of a large debt is neither an evil nor a blessing in itself. It has both adverse as well as favourable effect on the economy.

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