Get the answer of: Does an Internally-Held Public Debt Shift Burden to Future Generation?
Some economists have argued that public debt is invariably a burden on the future generations. They argue that the ‘burden’ of the debt refers to the problems that arise when it is repaid. They feel that when the government borrows the present generation escapes the burden. After the loans is repaid at a later date with interest the future generation (s) has (have) to suffer (by being forced to pay additional taxes).
It is commonly argued that borrowing results in a much more direct transfer of burden from present to future generations than its effect upon investment and capital formation. As persons often view borrowing, is use allows society to avoid any burden now-since no taxes are collected- while future generations must pay the taxes to cover interest and principal on the bonds.
This argument is not valid, however, for internal borrowing if burden is defined, as a reduction in private sector output due to the transfer of resources to the governmental sector. With this definition, the burden (assuming full employment) of the governmental activities is borne at the time the expenditures are made, whether the expenditures are financed by taxation or borrowing.
Thus, in this sense, the cost of World War II was borne during the war through reduced output of goods for civilian use, as resources were diverted from the manufacture of automobiles and other civilian goods to national defense items.
The burden was borne at the time regardless of use of taxation or borrowing; borrowing did not permit a shift of resources from future periods to the war period. In turn, persons in subsequent generations have no fewer resources available because of the borrowing, and real private-sector GNP is not reduced.
The future generations inherit both the bonds and the obligations that they represent. When interest and principal payments are made, funds are merely transferred from some persons to others in the same generation, a transfer that may have some adverse effects on the economy.
Given these definitions and assumptions, there is no shifting of real costs. And, so future generations are not burdened with the expenditures of the present except for the frictional effects of the taxes and provided that borrowing does reduce the current rate of capital formation more than taxation does.
There are, of course, distributional implications: The distribution of burden among individuals will be different with borrowing, from taxation. The argument does not apply to external borrowing, which gives the jurisdiction command over resources (through a surplus of exports over imports) when interest and principal are paid.
If, however, burden is defined as the reduction in personal satisfaction resulting from the financing of governmental activities, no burden is in- cured at the time the money is borrowed. The bondholders purchase bonds voluntary, exchanging liquid wealth for them and probably increasing not decreasing, their satisfaction.
The taxpayers pay no tax currently for the activity and suffer no burden. Bondholders have earlier given up consumption voluntarily to buy the bonds, or, more likely, have purchased the bonds in lieu of other assets. At the time the debt is repaid, the tax collected from the taxpayers places burden on them and reduces their consumption or saving.
The bondholders, on the other hand, experience no gain; they merely exchange their bonds for money which, in turn, they may place in other assets. A net burden has been imposed upon the future generations, shifted forward from the current generation. If the debt is not repaid, no burden is created except from the payment of interest; if governments borrow in perpetuity, no one bears burden other than interest charges.
In fact, at times the debt is incurred in ways that are beneficial to the next generation. If the government borrows to expand the productive capacity of the economy and put idle resources to work, the future generations will inherit a large capital stock and enjoy a higher output.
This means that the future generations benefit from the borrowing and spending activity that created the debt. When the time comes to repay the debt, it can be repaid more easily out of the higher national income they enjoy because of the borrowing in an earlier time.
In reality, we observe that national debt is never paid off. Although the Union Government of India pays of each individual holders of government debt when the securities mature, it does so on balance by rolling over or refinancing the debt – by issuing new securities. Thus, when one acknowledges that the national debt need not and will not ever be repaid or extinguished, a totally different picture of the burden of this debt arises.
Therefore, future generations need not pay-off the debt resulting from our extravagance. Any inter-generation burden of the debt-burden imposed by one generation upon a future generation-is not attributable to toe necessity of paying-off or even reducing the magnitude of the national debt.
Economists often feel that any inter-generational burden-burden imposed by one generation upon another-are attributable to toe quality and quantity of the physical and human capital stock passed on to the next and subsequent generations.
There is no doubt that large budget deficits and the growing size of public debt may ultimately crowd out or displace private Sent in plant, equipment and technology. Unless attributable to growth of government capital expenditure – projects such as schools and hospitals and infrastructure (roads, bridges etc.) – these defies are likely to lead to a reduced rate of growth to the nation’s capital stock.
However, it is incorrect to say that future generations will have necessarily to reduce consumption and use the proceeds to extinguish the debt they have inherited. No doubt, interest has to be paid to holders of government bonds.
This can be done by issuing new bonds or by imposing taxes to obtain necessary funds with which to pay interest. Both these methods will have deflationary effect on the economy. But, if the government prints more paper currency to pay interest on a rapidly expanding debt, severe inflation may ultimately occur.
The second qualification is that Indians no longer simply owe toe debt to themselves. A certain portion of national debt is now owed to foreigners. When those claims are repaid, India will have to transfer real goods and services away from domestic use to pay back foreign creditors. An external debt is undoubtedly a burden that will fall on future generations.