Is Government Debt a Burden or Not?

Government Debt is a Burden because of following reasons

When a govt borrows, it issues bonds to Public

On these bonds, Govt will have to pay interest in future

To Pay these interest, Govt will have to increase taxes in future

When govt will increases taxes in future, disposable income of people in future will reduce

Because disposable income will fall, consumption will also fall (as less amt will be available to be spent in future)

Less consumption will means less production in future and hence less GDP

Because GDP will fall, Savings of people will fall

So there will be less capital formation and less growth

hence, we can say Debt is a Burden on future generation

Counterview - Govt Debt is not a Burden

Debt does not matter because we own it to ourselves

If Govt borrows from Public, it will have to pay interest to Public

This Interest will be Income of Public

Hence, disposable income of public will increase

Because income of people increases, they will save more for their future generations

Hence Increase in Public Saving will offset Increase in Govt disaving

hence, National savings will not change

This counter view is called Ricardian Equivalence

What is Ricardian Equivalence?

It is an economic theory given by famous economist David Ricardo

As per this theory

Taxation and Borrowing are equivalent means of financing budget deficit

In case of budget deficit,

Govt can either increase borrowing which will be repaid by future generation by paying more taxes

or

Govt can increase taxes today and use the money to make more govt expenditure

If Govt increases borrowing today

It will lead to interest liability on govt

To Pay this int, Govt will increase taxes in future

People will expect that govt will raise taxes in future, so they will save more today by cutting their spending

If Govt Increases taxes today

Person's disposable income will reduce

Hence, they will be able to save less

However, Govt will be able to save more

In both cases, overall savings remain the same

Debt Does not Matter as we Own to ourselves.

Explain

If Govt takes debt from within the country (from public)

It does not matter

As Increase in Debt will lead to More Income and Savings for public

If Govt takes debt from outside country,

It matters as we have to pay interest to outside country

(it will be an expense for our economy and income for foreign country)

NCERT Questions

Question 12

Does public debt impose a burden?

Explain.

Other Books

Question 1

In the following questions, select the correct answers:

What is the theory of Ricardian Theory?

1. It states that government debt creates a burden
2. This states that government can either do borrowing or taxation and both have equal effect.
3. According to this government debt leads to reduction in GDP.
4. None of the above