What are the Disadvantages of Public Debts

Disadvantages of Public Debts (National Debts): In spite of a number of advantages of public debt, it is not an unmixed blessing. The public debt has been criticized severally by the economists. Its excessive use may create many monetary and other problems and may put the whole economy into a mess. So, its use may’ be made very carefully. Following are the chief disadvantages of public debt:

(1) Unproductive Loans: Productive public debt in the long runs in the interest of the nation. But, if loans are taken for unproductive purposes, they may be more harmful to the country because their burden on the community will be much more because the people do not get anything in return directly or indirectly. Excessive expenditure on war and armaments are the examples of unproductive debt. Thus, it is advisable that government should take proper care and adopt sufficient restraint while collecting loans for unproductive purposes.

(2) Public debts leads to Extravagance: Public deb is considered an easy money. It takes little time and strain in borrowing money from the public. This easy money can be spent very easily on any scheme requiring a huge sum without any due consideration for the probable returns. Easy money gives incentive to extravaganza. If the money is spent so easily; it will increase the burden of loan on the people but without any betterment of them. In this context, the words of Adam Smith may be reproduced here, “It (Public Debt) leads to extravagance, encourage resort to war and induces generally disadvantageous economic conditions for the nations which employ it”.

(3) It hampers the Economic Conditions. Repayment of debt is as urgent as taking of it. The debt is to be redeemed on, its maturity t along with interest. The government resorts to more and more taxes to collect money for the repayment of debt which reduces the ability of the people to produce and to save more because it brings nothing to them If the government fails to raise revenue from taxes, it adopts cheap monetary policies which may result in instability in the financial condition of the nation.

(4) Challenge to Political Freedom: External debt in most of the cases, is made available to the government having more often a political or diplomatic motive behind it. It has been experienced many tunes that such debts bring instability in the country. Generally, the lender country starts meddling with the national or foreign policies of the debtor country. It puts a challenge to the political freedom on even existence of the country.

(5) National Wealth Flows out: If public debt has been acquired from external sources, it is to be paid along with interest either in foreign exchange or in terms of goods and services, if it is paid in cash, valuable foreign exchange will be flown out. If it is paid in terms of goods and services, it will reduce the availability of these goods within the country and inflationary pressures on the economy will mount. In both the cases, it implies an out flow of wealth to the foreign countries. Sometimes, it happens that the government has to borrow afresh to repay the old loans. This is again not good for the development and prosperity of the nation.

It is clear from the above discussion that public debt serves an important purpose in the national prosperity if excessive dependence on it can be avoided. The government should borrow only when it is badly required.