Comparison Between Private and Public Debts

Comparison Between Private and Public Debts:

Similarities: There are similarities as well as dissimilarities between private borrowing and public borrowing. Private individuals and business house utilize borrowed funds to acquire certain resources. Private debt, therefore, involves the diversion of funds from one type of use to another. Similarly, public debt means the sacrifice of those productive use that the government may not like. Thus, basically, private and public borrowings imply the diversion of funds from one use to another.

Besides, Government as well as private individuals incur debt to meet their immediate or temporary requirements. Both have to pay interest on loans that they have taken. Governments have to compete like private borrowers in the money markets to attract funds. The capacity to borrow of both depends more or less upon their capacity to repay loans.

However, the analogy between private and public debt was observed by classical economists. It was, therefore, considered by them that “the national debt is bad and must be limited because there are normal constraints to debt capacity.”

In the case of private borrowing, the power of the borrower over disposable income increases, and that of the lender diminishes. Individuals must repay debt and, therefore, must forgo consumption at some future date to repay debt incurred by earlier borrowings. Excessive debt may lead the individual borrower into State insolvency. These consequences of debt that were applicable to private borrowings were supposed to be applicable and with equal intensity, to public borrowings. This was the view held by the classical economists.

But, modern economists pointed out that the Public-Private Debt analogy was erroneous, Thus, Prof. A. Hansen puts the whole issue of the so-called analogy between Private debt and Public Debt in the following words:

“An internal loan resembles ordinary (private) borrowing in a purely formal way, and it is obvious that every analogy to private borrowing must be completely false.” It means that public (internal) borrowings are distinctly dis-similar to private borrowings.

Dis-Similarities: The main differences between public debt and private debt are as follows:

In the first place, it has been argued that borrowing does not confer additional spending power on the government, since it has at its disposal various other fiscal devices which can be utilized for mobilizing the additional resources, needed by the government. At a particular time, the resources of the country are more or less fixed and so long as the resources to be mobilized are within the state boundaries, public borrowing as such does not lead to an increase in the purchasing power of the government. But, private borrowing does confer additional spending power on the individual.

Secondly, just as borrowing may not increase the spending power of the government, so also its servicing and amortization, (i.e., repayment) may not bring about a reduction in the government’s income. An individual has to curtail his consumption for the repayment and servicing of the debt he owes. But, the government need not do so, since it is able to obtain finance for repayment through various other sources.

Thirdly, excessive debt may lead the individual borrower into a state of insolvency. The same may not be true for the government because of the following reasons:

• It can coerce the people to pay additional taxes for the repayment of debt.
• It can raise fresh loans for the purpose of debt (old) repayments. The government can do so since it enjoys the confidence of the people as a secure creditor.
• The government can also resort to the printing of new money for retiring the loan amounts.
• The government may increase the price of goods and services provided by public enterprises in order to meet the servicing of debt.
• The government can redeem the whole of the debt by imposing a capital levy.
• The government possesses internal and external sources, but individuals do not possess such kinds of sources.
• Funds borrowed by the state, are to be used for the benefit of the community, while the proceeds of private loans are sued for the benefit of the individual borrower only.
• The government can compel the people to lend, while an individual cannot do so.
• Generally, the rate of interest on public loans is lower than on private loans because of the better credit to the State, though some corporations can also raise loans on equally easy terms.
• The government generally borrows money for productive purposes, while an individual may also borrow for consumption purposes.
• The repayment of public debt is done out of the government revenue including the income from public enterprises, while the individual has to repay the debt from his won earnings. Therefore, the nature of the burden of public debt is different from that of private debt.

Finally, the government may resort to borrowing as a matter of public policy, even, if it does not need funds. Borrowing may help to bring about some stability in economic life. In times of inflation, it may reduce the volume of purchasing power in the hands of the people and may help to bring down prices. In times of depression, it may enable a government to incur certain types of expenditure, which may help to raise the level of business activity and employment. But an individual may not borrow when he does not need them.

It is, thus, obvious that there is no analogy between private debt and public (internal) debt. And the classical economists were wrong in assuming such an analogy.