BusinessFinance

Reasons For Increase in Public Debt in Modern Governments

The size of public debt has increased tremendously in recent years and especially after the Second World War. Now, there is hardly any Government which has not contacted public debt internally and externally.Let us see the main reasons for increase in public debt.

The main reasons for increase in public debt are as follows-

(1) Developmental Planning: Modern Governments have resorted to planned development of the country and intervene in economic affairs according to the requirements of the economy. Almost all the Government in the world have abandoned the policy of free trade and non-intervention of the State in business and industry. The planned economic growth requires huge funds that cannot be collected through taxation. The Governments, therefore, borrow funds from the public.

(2) Unpopularity of Taxation: Taxation always initiates opposition from the public and therefore. the Government cannot raise unlimited funds by way of taxation. It chooses the easier way for meeting this opposition, of raising funds through public debt.

(3) Controlling Inflation: Through public borrowings on a large scale. The Government withdraws a large amount of money out of circulation that helps contain the inflationary pressure in the economy. The Governments in developed and developing counties take recourse of public borrowing to reduce the inflationary pressure in the economy.

(4) Waging Wars: During the wars, Governments have to borrow heavily from the public to meet their war-expenditure. In fact,  it has turned out to be the most important reason for the phenomenal growth in public debt. It was the Second World War that forced the Governments to borrow funds from public.

(5) Facing Natural Calamities: In facing natural calamities such as floods, earthquakes, famine etc. the Government raise funds through public debt because the amount of such loan is not substantial and moreover its nature is not permanent.

(6) Deficit in the budget: While preparing the budget, the Government sometimes leave the deficit in the budget uncovered. If the Government does not think it proper to meet the deficit by resorting to additional taxation, it fills up the gap by resorting to public borrowings. It may also adopt the second course of printing and circulating additional currency equal to the amount of deficit in the budget. But, it is also one way of public borrowing that may lead to inflation.

(7) Controlling Depression: Public borrowing is also looked upon as an effective measure to check depression and unemployment situation in the economy. The reason is that if the Government raise revenue through taxation, it will adversely affect the capacity of the people to work and to save and therefore investment in industry and trade will be harassed. In such a situation, public borrowing may be the best way because the people who have capacity to save will contribute towards public debt therefore, it will not affect the people of low income group. Moreover. the debt so raised will be spent by the Government for productive and developmental purposes which in turn increase the production and demand of the commodities. It will thus improve the economy.

(8) Increased Public Expenditure: There is a substantial increase in public expenditure due to the developmental activities of the Government. These activities have increased the responsibilities or the Government to a large extent. Due to the increased public expenditure unparalleled to taxation revenue has contributed to the increase in size-of public debt.

Thus, the increase in public debt is largely due to increased government responsibility towards the business and the society. Beside these, there may be some other reasons for increase in public debt / government debt/ national debt.

Tags
Show More

Related Articles

Close