Public Debt

The public debt is the fund borrowed by a nation's government. Governments borrow from people, banks, organizations, and other countries. It is an aggregation of all internal and external debt liabilities pertaining to a nation.

When the government runs into a budget deficit, it must borrow funds from various sources. In addition, governments borrow funds for public welfare schemes, wars, nuclear programs, and infrastructure projects. Public debt is also used for reviving dysfunctional public sector enterprises.

• Public debt or sovereign debt refers to the outstanding loans borrowed by a government from individuals, financial institutions, companies, other nations, or international organizations.
• The sovereign debt has a revenue effect on the economy. It influences the nation's consumption expenditure. Sovereign debts also have an expenditure effect; acquired funds are used for specific funding purposes. They are not used to cover general expenses.
• When a sovereign loan is taken for income-generating activities like developing irrigation facilities, it is considered a productive debt; funding a war with loans is considered an unproductive debt.

The government often borrows money domestically or internationally to meet the nation's financial needs. The loan could be for the short, medium, or long term. The public debt or the sovereign debt helps a government-run, build, and develop the country.

For example, governments take loans to cover budget deficits, infrastructure projects, wars, nuclear programs, public welfare schemes, or for the operation of public corporations. But if a country keeps borrowing excessively, the debts will pile up. Excessive debts are caused by the misuse of revenue, tax cuts, tax relaxations, low revenue from taxes, natural calamities, and disasters.

However, public debt burdens the national expenditure. On top of the principal amount, the government has to pay interest for the loans—installments are hefty. Further, for loan repayment, the public is taxed heavily. External debts can affect nations adversely—they restrict economic growth and development. Sometimes, countries take many years to clear their sovereign debt.

Public debts are classified based on the source, the reason for borrowing, terms, and tenure:

#1 - Internal and External Debt

Internal debt is the loan acquired from the people, banks, or companies within the nation in the local currency. In contrast, external debt includes the funds borrowed in foreign currency from other countries or international organizations.

#2 - Productive and Unproductive Debt

When a sovereign loan is taken for income-generating activities like developing irrigation facilities, electricity plants, or roadways, railways, and bridges, it is considered a productive debt. However, funding a war with loans is considered an unproductive debt.

#3 - Redeemable and Irredeemable Debt

Loans with fixed future repayment dates or maturity dates are called redeemable debts. In comparison, loans without fixed repayment dates are called irredeemable debts. With irredeemable loans, governments are not required to pay regular interests.

#4 - Voluntary and Compulsory Loans

When the government issues debt securities to raise funds from individuals, firms, and financial institutions, it is considered a voluntary loan. On the other hand, debts that bind people to a compulsory contribution or mandate taxpayers to deposit a sum are considered compulsory loans.

#5 - Short-Term and Long-Term Debt

Sovereign loans that are repaid within one year are considered short-term debt. Long-term loans are paid back in ten years or more.

#1 - US

In May 2022, the US owed a public debt of $30.49 trillion. Since 2000, United States’ debt has been rising. It has become a major concern for the federal government.

This value includes intragovernmental debt owed to Social Security and public debts such as bonds and treasury bills. There is political strife between the Democrats and Republicans on how to manage indebtedness.

The government facilitated tax cuts and stimulus packages to aid people during the Great Recession and the Covid-19 Pandemic, but these measures led to a rise in US public debt.

#2 - India

In December 2021, India owed a public debt of ₹117633514.3 million. The sum is further divided into two—₹8168293.6 million is owed as external debt and ₹109465220.7 million as internal debt.

Sovereign debt affects a nation in the following ways:

#1 - Revenue Effect

When the government acquires funds by releasing government securities, citizens either reduce their expenses or save more to invest in such assets. It thus impacts the nation's consumption expenditure. Consumption expenditure is the amount spent on goods and services for meeting the needs of individuals and communities.

#2 - Expenditure Effect

The expenditure of borrowed funds is different from that of the tax revenue. It is usually used for special purposes like infrastructure development, welfare programs, or meeting war expenses. Tax revenue, on the other hand, is used for regular expenses.

#3 - Other Effects

The sovereign debt also influences other national aspects—production, distribution, consumption, employment, cost of production, and investment.

Recommended Articles

This has been a guide to What is Public Debt and its meaning. We discuss public debt types, effects, & examples from countries like US, & India. You can learn more about it from the following articles –

• Public-Private Partnership
• National Debt
• Debt Fund