Public borrowings are not compulsory levies but purely a voluntary contribution by those who have surplus. But the Government has to repay such amount of borrowings as well its interest as and when due. It is, therefore, a charge on Government’s future revenue.
Merits of Public Borrowings: The following point can be put forth in favor of public borrowing if the entire development plans ace financed through this sole source of revenue-
(i) For the people of the country, public borrowings are considered better than taxes as taxes are never returned to people whereas the amount lent to the Government will be returned by the Government along with interest as and when due.
(ii) In case heavy taxes arc levied by the Government the people have to cut down their consumption. On the contrary, public borrowings are contributed by them out of their savings and therefore their present income remains unaffected hence there is no adverse effect on their consumption.
(iii) It is in the larger interest of the nation if the development expenditure is met out of public borrowings. The reason is that public borrowings do not adversely affect the capacity of the people to work and to save and also the production and business and trade like taxation. The process of capital formation remains unaffected.
(iv) If the Government collects a sizable amount through public borrowing. it need not resort to deficit financing.
(v) Interest received on public borrowings by the people is a source of their income while there is no such income in taxation.
Demerits of Public Borrowings: The following arguments against public borrowings as sole source of development expenditure can be put forward
(i) Like taxation, there is a limit to public borrowings also. The saving capacity of the people is itself is limited. Hence, the entire development expenditure cannot be met through public borrowings.
(ii) Public debt is a burden on the people. If the entire development expenditure is met through borrowing, the size of
the debt will be greatly inflated and its burden will ultimately be borne by the tax payers.
(iii) The burden taxation is invariably on the present generation. But in case of public borrowings, the ultimate burden will be shifted on to the shoulders of future generation because public borrowing is nothing but to postpone the tax burden to the coming generations. This is contrary to justice and fair play.