What are the Burden of Internal and External Debt?

Burden of Internal and External Debt: Public debt as the name suggests represents the borrowings of the state taken from the public within the country or outside the country. If the public debt is contracted by the government from the citizens of the country, it is internal public debt. On the other hand, if the debt is contracted by the government from the foreign individuals, governments or institutions, it is known as external debt.

In both types of debts (burden of Internal and External Debt), the government has to pay interest and the amount of principal as per terms of borrowings. But the incidence of internal and external debt is different in both the cases. The internal debt is better than the external debt mainly because of the two reasons:

  • Firstly, when government takes foreign loans, a heavy sum is remitted out of country for the payment of interest annually. It affects our foreign currency reserves,
  • Secondly, external debt also poses threats to the economic and political independence of the country. There is no such threat in internal debt. The resources are transferred from creditor country to debtor country. Thus a foreign debt affects the economy and the political situation of the debtor nation.

Burden of Public Debt (internal and external debt):

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Public borrowings are to be paid by the government along with interests. The government imposes new taxes on the public and repays the loans and meets the annual interest on such loans out of the proceeds of the taxes. The sacrifice of the people in the form of payment of taxes is the burden of public debt. The burden of public debt may be direct or indirect. Direct burden is the total sacrifice made by the people in terms of money and otherwise whereas indirect burden of public debt represents the side effects of pub lie debts or economic and social conditions of the people.

The burden may be classified as money burden and real burden. Money burden means total sacrifices in terms of money whereas real burden means the total burden including money burden. The burden or incidence of public debt is not the same for the internal debt and external debt. We shall discuss the burden or incidence of internal debt as well as external debt.

The incidence of internal and external debt can be studied under four subheads:

(i) Direct money burden.

(ii) Indirect money burden.

(iii) Direct real burden.

(iv) Indirect real burden

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