debt, public: Reasons for Government Indebtedness

Reasons for Government Indebtedness

Governments may borrow to meet temporary needs, as when estimated revenue falls below or is exceeded by estimated expenditures. Short-term treasury notes, payable by increased taxes or by greater economizing, may be issued, but such a debt should not become permanent. Nonetheless, many national goverments incur such debt because of an unwillingness to limit spending or increase taxes for fear of the political consequences. Borrowing to finance public works, especially when widespread unemployment exists, is another source of public debt and is justified in part by their long-term social utility. The largest public debts are incurred to meet emergencies, such as war debts that arise when it is difficult to finance the extended activities of the government by new or increased taxes, or when the government must borrow abroad to finance the war effort..

Public debt is advantageous in that part of the national funds are secured at an interest rate lower than that provided to private industry and in that the financial operations of government are funded on a permanent basis. It may also have an expansionary effect on employment and production during times of high unemployment. The disadvantages are that unjustifiable projects may be undertaken because the full burden of payment is postponed; that the government's demands may become so large that the interest rate on government bonds will rise to the point where money is diverted from private enterprise; and that too great a debt may induce governments to depreciate currency or default on obligations.

Sections in this article:

See more Encyclopedia articles on: Money, Banking, and Investment