The public burden may be classified as money burden and real burden. What is the related Burden Definition, then? 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.
(A) Incidence of Internal Debt: The incidence of internal public debt can be studied under four subheads–>
(i) Direct money burden.
(ii) Indirect money burden.
(iii) Direct real burden.
(iv) Indirect real burden
(a) Direct Money Burden: The internal debt has little or no money burden. It affects only the distribution of purchasing power or wealth from one section to another section in the society. When the government raises public debt, the purchasing power gets transferred from lenders to the government. The government uses the amount of loan so raised for productive purposes as a result of which, the amount is again got transferred from the government to the various sections of the society such as workers, contractors or producers. If, on the other hand, debt is taken for unproductive purposes such as to finance the war, it is a dead weight debt and will be repaid only out of taxation revenue, it will be burdensome to the community.
(b) Indirect Money Burden: When the government spends the amount of debt on productive and developmental projects, it results in creation of demand for several commodities and service. As a consequence, the prices of such commodities rise up imposing additional burden on the community. This represents the indirect money burden of the public debt.
(c) Direct Real Burden: The government repays the internal debt by imposing new taxes or increasing old taxes on the people. This process again transfers the purchasing power from one section to the another. Taxes are generally paid by all including the poor whereas the bond holders are better off people. When the debt is repaid, to lenders after collecting taxes from the public, the purchasing power is transferred from the poor to the better of society. This further accentuates the inequalities in the distribution of wealth in the community. It widens the lap between the poor and the rich. This represents the direct real burden.
(d) Indirect Real Burden: The government, in order to pay public debt, imposes additional taxes on the people. The rich have to pay more in terms of taxes. As against this, the amount of debt is to be repaid to the better off. The economic inequalities get further accentuated. This produces adverse repercussion on the capacity to work and to save of the people as a consequence, the productive capacity declines. The government may even have to apply cuts in socially desirable expenditure which may have adverse reactions on the people’s capacity to work and to save. To that extent, the general welfare of the community is adversely affected. This, in fact is the indirect real burden of internal debt on the community.
(B) Incidence of External Debt: The incidence of external debt may also be discussed under the same four heads as follows-
(a) Direct Money Burden: When the government takes foreign debt, the wealth is transferred from the lender country to the borrower country. When the amount is spent 0n productive projects in the country, the purchasing power gets transferred from the government to the public. It increases the total wealth of the country. But the government (debtor) has to remit a sizable amount of foreign currency every year to the lender country by way of interest.
After the expiry of the term, the principal of loan is also remitted to the lender country in foreign exchange. The amount of interest paid every year and the principal repaid on maturity, in foreign exchange to a foreign country represents direct money burden on the society. Whereas, in case of internal debt, the amount of principal and interest is paid to the citizens within the country hence it is a simple case of transfer of purchasing power from government to citizens.
(b) Indirect Money Burden: Sometimes, the interest and the principal on external debt are paid in terms of goods and services. This inevitably results in a rise in the prices of goods and services within the country. The people have to suffer and the public welfare is reduced. This represents indirect money burden.
(c) Direct Real Burden: The government very often levies fresh taxes or increases the burden of old taxes on the people to repay the, external debt. Ordinarily, the real burden of taxes is heavier on the poorer rather than on the richer section of the society. To that extent, the economic welfare of poor people is reduced. It represents the real direct burden.
(d)Indirect Real Burden: Due to fresh levy or taxes on the Community to repay public debt, the capacity of people to work and to save is adversely affected. Ultimately, the productive capacity of the people sharply declines. This represents the indirect burden.
Thus, public debt whether internal or external is never burdensome if the proceeds of the loans are spent for productive purposes because a productive debt automatically generates revenue for its repayments by creating new productive assets in the country. But an unproductive loan is always burdensome because it produces nothing and reduces the public welfare.