Finance

Difference Between Public Debt and Private Debt

What is public debt? Debt means borrowing of funds from another. Public debt therefore, refers to an amount borrowed by the government from it public or from foreign agencies to meet the deficit of public revenue and public expenditure. Thus government resorts to this source of finance only when the expenditure of the government exceeds the public revenue. Findlay Shirras has defined public debt as -“National debt is a debt which a state owe to its subjects or to the nationals of other countries.”

An individual also takes loan from another person or institution. Public debt (loan taken by the government or government debt ) and private debt (loan taken by an, individual) have the following points of differences.

 (1) Power of Compulsion. The government holds the sovereign power in her hands and can force the people of the country to lend to her in case; of need or emergency. Any avoidance or defiance of orders may be declared illegal. An individual’ cannot force another individual to lend him money even in emergency.

(2) Power of Repudiation. The government can repudiate loans taken by it from the public at any time and without an obligation but an individual can, under no circumstances refuse to pay loans to another person. He can be forced to repay loans through legal recourse.

(3) Durability of Debts: The government is a continuous changing institution. So, a government can contract loans from the public for a very long time. But, an individual cannot however contract loans for such a long period. He can secure loan only for a short period.

 (4) External and Internal Debt: The government can borrow funds from internal and external sources. In other words, the government can borrow funds from itself or from others. When government resorts to print paper notes etc., to cover the deficit, it is amount to taking loans from itself. But when it borrows from the public or from foreign governments or international agencies, it amounts to loans taken from outside sources. An individual, on the other hand, cannot borrow from himself and from a foreign government or agency. He can borrow only from another person or national institutions.

(5) Payment through Taxation. The payment of public debt is done through taxing the people. Additional taxation is levied on the people with a view to repay the amount of loan. The burden of which is also borne by the creditors. As against this, an individual cannot increase the volume of income to repay loans and the burden of private debt is never borne by the creditors in any form.

(6) Rate of Interest: Since the credit of the government is high in the eyes of the public and those of the foreign people and governments, the rates of interest on public loans are very low as compared to rates of interest on private loans.

(7) Purpose of Loan. The main aim of public debt is to promote public welfare including the ‘creditors. The amount of loan spent on developmental’ projects benefit the people including the .creditors. On the contrary private debt does not benefit the creditor    at all.    Public debt is always spent for productive purposes whereas; private debt may be spent for productive and non-productive purposes.

 (8) Impact on Economy. The impact of public debt is to contain the inflationary pressure in the economy, because the purchasing power of the people is reduced by public debt. On the contrary, the individuals are not allowed to take loan with such a view.

(9) Liquidity. Public debt certificates can be sold in or purchased from the market if the creditors like to realize the loan or invest their surplus funds. But the private debt can be repaid only by the debtor and the creditor cannot realize it as and when he likes before maturity.

Thus the nature of public and private debt is fundamentally different because the activities of toe two are not similar in nature.

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