Government Debt is a Burden because of following reasons
When a govt borrows, it issues bonds to Public
On these bonds, Govt will have to pay interest in future
To Pay these interest, Govt will have to increase taxes in future
When govt will increases taxes in future, disposable income of people in future will reduce
Because disposable income will fall, consumption will also fall (as less amt will be available to be spent in future)
Less consumption will means less production in future and hence less GDP
Because GDP will fall, Savings of people will fall
So there will be less capital formation and less growth
hence, we can say Debt is a Burden on future generation
Counterview - Govt Debt is not a Burden
Debt does not matter because we own it to ourselves
If Govt borrows from Public, it will have to pay interest to Public
This Interest will be Income of Public
Hence, disposable income of public will increase
Because income of people increases, they will save more for their future generations
Hence Increase in Public Saving will offset Increase in Govt disaving
hence, National savings will not change
This counter view is called Ricardian Equivalence
What is Ricardian Equivalence?
It is an economic theory given by famous economist David Ricardo
As per this theory
Taxation and Borrowing are equivalent means of financing budget deficit
In case of budget deficit,
Govt can either increase borrowing which will be repaid by future generation by paying more taxes
or
Govt can increase taxes today and use the money to make more govt expenditure
If Govt increases borrowing today
It will lead to interest liability on govt
To Pay this int, Govt will increase taxes in future
People will expect that govt will raise taxes in future, so they will save more today by cutting their spending
If Govt Increases taxes today
Person's disposable income will reduce
Hence, they will be able to save less
However, Govt will be able to save more
In both cases, overall savings remain the same
Debt Does not Matter as we Own to ourselves.
Explain
If Govt takes debt from within the country (from public)
It does not matter
As Increase in Debt will lead to More Income and Savings for public
If Govt takes debt from outside country,
It matters as we have to pay interest to outside country
(it will be an expense for our economy and income for foreign country)
NCERT Questions
Question 12
Does public debt impose a burden?
Explain.
View AnswerGovernment Debt is a Burden because of following reasons:
When a govt borrows, it issues bonds to Public
On these bonds, Govt will have to pay interest in future
To Pay these interest, Govt will have to increase taxes in future
When govt will increases taxes in future, disposable income of people in future will reduce
Because disposable income will fall, consumption will also fall (as less amt will be available to be spent in future)
Less consumption will means less production in future and hence less GDP
Because GDP will fall, Savings of people will fall
So there will be less capital formation and less growth
hence, we can say Debt is a Burden on future generation
Other Books
Question 1
In the following questions, select the correct answers:
What is the theory of Ricardian Theory?
- It states that government debt creates a burden
- This states that government can either do borrowing or taxation and both have equal effect.
- According to this government debt leads to reduction in GDP.
- None of the above
B. This states that government can either do borrowing or taxation and both have equal effect.
Explanation
