Effects of Public Debt.pptx

Effects of Public Debt

1. Effects of Public Debt

2. Positive Effects of Public Debt

3. 1.Mobilization of resources: With the help of borrowing govt. can easily make various types of plans to mobilize the resources efficiently to finance various projects. 2 .Increase in the productive capacity: Borrowing is very much helpful in using capital intensive techniques to increase the productive capacity of a country. 

4. 3. Promotion of Investments: - Public borrowing helps in promoting investments . Borrowed fund can be utilized for strengthening social and economic infrastructure. 4. Financing of Developmental expenditure: - Borrowing can be used to meet the developmental expenditure like roads, communication system, railways telecom, finance etc. 

5. 5. Obtaining foreign exchange: - For development purpose govt. tries to acquire money capital, raw material from foreign countries. It can then only be possible if we have good stock of foreign exchanges with us.

6. Effects on Consumption:   When people subscribe to government loans, they generally have to curtail consumption.   Since investment of funds raised by borrowing raises the level of employment and as a result raises the level of consumption.

7. Effects on Distribution:   Public loans transfer money from rich to government.   The fiscal operations of the government are to benefit the poor primarily.   The income of the poor increase directly through increased employment or it benefits them in directly through the enlargement of social services.

8. Effects on the Level of Income and Employment:   In modern times, public borrowing is resorted to in order to raise funds for financing agriculture, industry, mining, transportation, communication, etc.   It increases employment opportunities, the level of income and standard of living.

9. Adverse Effects of Public Debt

10. Inflationary impact: Whether public borrowing is Inflationary or anti- inflationary depends on how the debt affects the money supply and how it affects economic activity. Loans from banks (say purchase of government bonds by commercial banks) lead to an increase in money supply. This will put a great pressure on the price level. In this sense,  ‘borrowing is inflationary’ .   However, if public debt is used to raise income, employment and output, the inflationary effect will then be greatly minimized.

11. 2. Additional tax burden: To repay the old loans, Government has to impose new taxes on people which will be extra tax burden on the people and it pinches a lot.  3 . Adverse effect on saving and investment : For the repayment of loan when govt. imposes new taxes on the people there will be adverse effect on saving and investment

12. 4) Effects on distribution of income: If loans are raised to finance unproductive activities like repayment of loans, resources then may not be allocated in an optimal manner As far as loan repayment is concerned, government levies taxes whose burdens are felt more or less by all—both rich and poor. However, burden of taxes is mostly felt by the poor people. Rich people who lend money to the government earn more interest income than what they sacrifice by paying taxes. Hence inequality widens.

13. 5 ) Unproductive debt: Apart of the loan taken by the govt. is used to meet the non developmental expenditure which never helps in increasing the production in the country. Thus it is called dead weight debt which is very difficult to repay. 6) Debt servicing burden: The annual interest paid by the govt. in lieu of debt increase is known as debt servicing burden. There is very large increase in debt servicing burden in every country in modern times which has very dangerous consequences.