Introduction:

Due to increase in the activities of the Government the volume of public expenditure has rising over the years and every time it is not possible to meet a increase expenditure through the traditional source of revenue that is taxes beside increase in taxes are unpopular with the general public thus the Government obtains additional revenue through borrowing. In present times borrowing by the government has become a routine method of financing along with other resources of rising revenue. Public debt or government debt is the debt which the government owes to individual, business enterprise or banks it can borrow from within or outside the country. The purpose of public debt is

Purpose of public debt:

Generally government may borrow for mainly the following purposes;

• To meet the deficit in the budget
• to meet some unforeseen contingencies like floods, famines, earthquakes etc
• to finance war or war preparedness
• to finance development plans
• to Undertake welfare schemes
• to curb inflation
• to finance public sector

Burden of public debt:

The traditional view is that public debt as in the case of private debt impose real burden on the community. the classical view maintain that if the government expenditure is finance through taxation the present generation bears the burden but if the government expenditure is financed through public borrowing the present generation get relief from the cost and burden is shifted to the future generation. The future generation suffers when present generation reduces its savings in order to meet the debt finance and leave a smaller amount of capital resource for the future this will reduce the productive capacity of the future generation and accordingly they will stand to lose.

Economist like JM Keynes and others is chief exponent of the modern version of debt burden. The modern theory of public debt is put as “the new orthodoxy” by Professor Buchanan.

The worldwide depression of 1930 and the emergence of the 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 nation.

During periods of depression, the technique of deficit budget finance through borrowing can be fruitful utilized to improve employment situation and generating effective demand and thereby raising the level of economic activity. Under the shadow of say’s law propagated the misconception that persistence technique of unbalancing the budget coupled with increasing the proportion of public debt endangers the very economic stability of the nation.

However the modern theory strongly believes 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.

also read: explain the effects of public expenditure on production and distribution.