Finance

What Are The Advantages of Public Debt

Advantages of public debt which is otherwise known as Government debt: Raising loans by the modern governments from internal as well as external sources has become a common phenomenon now-a-days. Being welfare governments, they have to spend a lot on the welfare of their citizens whereas the tax revenue is quite insufficient to meet the expenditure especially in under developed countries. So, the government has to resort to public borrowings.

Advantages of Public Debt

Hardly is there government in the world which does not contract public debt (government debt). Since Second World War, the size of- public debt has been increasing day by day. The continuous rise’ in public expenditure has necessitated the rise in public debt for the welfare of the society.

 The following are the advantages of Public debt (government debt) :-

(1) Meeting Wartime Expenditure: The unwarranted situation arising out of war and the prosecution of war cannot be possibly met out of ordinary tax-revenue. Hence, the government has to resort to public borrowings to collect sufficient funds to meet the cost of war. There is no other way left with the government to meet this abnormal expenditure.

(2) Fighting against Contingencies: Contingencies are uncalled situation that need a lot of money to fight against them. In such circumstances. public debt is only way out with the government to meet the cost of such contingencies like floods, famines, drought, earthquakes etc. Such situations need immediate solutions for which the public debt (government debt) is the only answer because tax collection requires a tot of time.
(3) Coping with Depression: In order to fight against depression in the economy, the government generally goes in for public debt. The depression brings an atmosphere of despair and frustration specially among producer because of low demand for goods and services due to falling prices and profits. The government, in fighting such a situation, resort to large scale construction of public works such as railway, roads. dams, canals etc. to provide employment opportunities to the unemployment.

Money invested in such projects can be repaid only in the long-run and, therefore, public borrowing may be resorted to meet the cost of construction of such public works. During depression, the people cannot pay more taxes to the government hence the government would not like to collect funds by increasing tax revenue because extra taxation would affect their capacity to work and to save and therefore would bring down the effective demand. The government takes public debts from banks or from external sources and finances the public works to augment the employment opportunities and to increase the effective demand of goods.

(4) Financing Development Projects: The government cannot speed up the pace of economic development only with its tax- revenues specially in under-developed countries because the taxable capacity in such countries is low and therefore, the huge amount required for the development of the economy cannot be collected through taxation. But the development is must and this can only be achieved through public borrowings. With the help of these loans, the government may take steps to bring about the speedy development of various sectors of the economy i.e agriculture, industry, transport and other basic infrastructure.

(5) Providing for Social Services: Public borrowings finance the social services like educations, medical aid, cheap housing, social. security measures etc. They require huge sums to be invested. These loans add to the productive capacity of the people hence they turn to be productive. The amount to be spent on these services cannot be sufficiently be raised through taxation.

(6) Containing Inflationary Pressure: Public debt may be used as an instrument to check inflationary pressures in the economy. The government draws out a lot of money in circulation from the people who have surpluses. It keeps their mounting expenditure to a modest size. Drawing out of purchasing power from the public may help check the inflation.

(7) Advantages to Investors: Lenders of public debt are also benefiting by it. Their investment is safe with the government in the sense that its interest and the principal are guaranteed by the government and therefore, it has no risks of losing their investment. The liquidity of government debt is more because they can be sold at any time in the open market.

(8) Finance to Public Enterprise: Public sector plays a significant role in the development of the economy. of a country. The nature of public enterprises is such as to take up such projects which are not undertaken by the private sector due to heavy investment. The government borrows funds from the public and finances them towards their capital to facilitate them to undertake such projects. Besides producing goods and services, they help in building sound economic foundation and putting the economy out of the vicious circle of poverty.

There may be other Advantages of Public Debt/Public Borrowing for any government based on the necessity of the fund from time o time.

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