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Why is public debt incurred?

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i). To meet budget deficits. Modern governments do not have large accumulated balances or treasure to meet any budget deficit. Normally, the annual expenditure of the government should be and is met by annual income. But because of many circumstances the yield from taxation and other sources may not be equal to the actual
expenditure. Similarly, there may be unplanned and unexpected emergency situations like major fires, floods and famines. Short-term borrowing is ordinarily used to meet
these emergencies.
ii). To meet war expenditure. Modern warfare is so costly that the normal income through taxation falls short of the actual war expenditure. Besides, taxation beyond certain limits has disastrous consequences for important objective during a war, viz., the winning of the war. Moreover, a public loan is better and easier method of collecting revenue than taxation. Governments, therefore, have to borrow extensively from individuals and institutions towards war financing. In fact, the enormous increase in public debt in most countries is due mainly to the First and Second World Wars.
iii). To remedy a depression. Public borrowing is considered very useful to remedy a depression; in fact, the strongest case for public borrowing is as a remedy for depression. During a period of depression, the level of economic activity is low, resulting in low production and unemployment. The depression and unemployment are generally due to deficiency of demand for goods and services. Many economists like Keynes have advocated increased public expenditure financed through borrowing and not through taxation, for while taxation will reduce incomes and demand still further, borrowing will have no such effect. Besides, loans enable the government to make use of idle and unutilized funds of the public. Thus, there is a strong justification in favour of public borrowing to cure unemployment.
iv). To develop the economy. Public loans are resorted to for development purposes. Even advanced countries have to undertake the construction of public works like roads, railways, irrigation works, powerhouses, etc., for accelerating their economic progress. Underdeveloped countries interested in the development of their natural resources to the optimum level find public borrowing a very useful device to finance the various
development projects.
). To finance social overheads. Public debt is used to finance the creation and
development of social overheads capital like education and health care facilities. These
basic facilities require huge investments, which cannot be met by ordinary source like
taxation. Hence modern governments utilize borrowed money to finance these projects.

Judiesiz answered the question on July 10, 2018 at 06:55

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Why is public debt incurred?

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