Title Theories of Public debt.pdf ✅

Theories of Public Debt Classical View Keynesian View Post-Keynesian View (After the World War II) Modern View Intergeneration Equity and Shifting of Burden to Prosperity 1. Classical View 2. Keynesian View 3. Post-Keynesian View 4. Modern View They were against the public debt because of the belief that public debt becomes burden to the government To maintain the deficit financing, the government has to increase the tax rate Deficit financing increases price inflation However, they emphasized balanced budget The government should increase the public debt to enhance the economic prosperity Resources in private sector may remain unemployed for relatively longer period if corrective or compensating action is not taken by the government To correctly utilize the budget, it can be classified as regular and capital expenditure The countries realised if the size of debt is high, it will bring the country into debt trap According to Richard Goode (1984), the government should not take public debt for current expenditure. Internal debt increases the level of national saving and investment. External debt increases the economic burden for the country because it will increase demand of finished goods rather than production of that. Capital overhead projects need a lot of investment. So, the tax rate should be high to maintain luxury expenses (e.g. Liquors, Vehicles etc) In case of war and emergency, public debt is effective tool than taxation Mobilization of resources for capital formation is equally important after public borrowing
2 Classical View 3 Pigou Concept (Capital Stock Transfer Theory) 4 Bowen-Davis-Kopf Hypothesis 1. Transfer of public debt burden to Posterity (Future Generation) It refers to sacrifices that the future generation has to make for debt servicing (paying public debt principal and interest) through a rise in taxation at the time of repayment or for paying interests. It is the cost that are imposed upon the economy when the public debt is loan financed rather than tax financed. The real burden of public debt is borne by the future generation. Repayment of debt through taxation will affect the future investment Classical economists claimed that through debt financing, it is the present generation which suffers a loss of resources. Current financing (especially in the case of war) requires resources immediately So, the present generation has either to cut off consumption or saving or both to meet the current needs According to Prof. Dalton (1971), “ The burden of a public debt is not something which can be thrown backward and forward through time and made to fall at will, wholly on one generation or wholly on another.” According to A.C. Pigou, the welfare of future generation depends upon the sacrifice of present consumption without which capital cannot be formed to build up larger productive base. The burden of debt shifts to the future generations if the debt is done through loan. If it is done by taxation, the burden of taxation limits to the present circumstances If taxation is financing public debt, the taxpayers are more likely to decrease consumption. If it is done by taking loans, the lenders (who give loan) are more likely to cut off saving and investment Loan financing will reduce consumption. Since reducing consumption will be less, the transfer of real capital stock of future generation will also be less. This will mean reduced future welfare. Hence, loan finance shifts burden to the future generation, while tax finance does not do so. According to them, the burden of pubic debt is transferred to consume for different generations. The present generation does not agree to reduce consumption even-though they may be ready to decrease their savings According to this hypothesis, the consumption pattern of different generations changes due to the burden of the public debt but investment remains uncnhanged.
5 Modigliani Theory 6 Musgrave;s Concept Here, let us suppose a public investment project whose services are available in equal installment over 3 periods- I, II, III. Old generation increase its consumption while decrease occurs in the consumption of the newer generation. Developed by Franco Modigliani He put forward the concept of burden of public debt shift to the future generation concentrating his idea on the long-run stock and changeable variables When the government manages the fiscal policy through public debt then it reduces the capital accumulation of the private sector which ultimately becomes burden to the future generation Taxation creates burden to the present generation only whereas debt financing transfers burden to future generation Public debt is burden on future generation because capital stock for future income is reduced by present borrowing. If the effective rate of return on private investment is equal to 5%, potential future income is reduced by 5% for every Rs 100 borrowed by the government and also people’s asset holding in the form of government bonds will affect their willingness to save adversely. If debt financing is invested in the capital overhead projects then an equivalence between future gain and future cost will be established. This reduces the burden of public debt to the future generation If the public debt is spent on the recurrent expenditure, the public debt will be the burden for the future generation The cost of a public investment project should be borne by the users in proportion to the benefit enjoyed.
Also, suppose that the life span of each generation extends over to these three periods and that the population is stable. Let the project costs 900 units of money and we assume the loans taken in any one generation has to be repaid within its life span. Now, the generational cost/benefit share as we see is highest for 3. If the total benefit is divided equally in 9 parts, the 1st and 5th generation should bear 1/9th of the cost, the 2nd and 4th generations should bear 2/9th of the cost and the 3rd generation should bear 3/9th of the cost.