Saturday, June 5, 2010

Public and Private Debt

Public debt refers to borrowing by a Government from within the country or from abroad, from private individuals or association of individuals or from banking and non-banking financial institutions.

Classification of Public Debt:

· Internal and External debt: Internal debt is raised from within the country and external debt is owed to foreigners or foreign governments or institutions.

· Productive and Unproductive debt: The productive debt is expected to create assets which will yield income sufficient to pay the principle and interest on the loan. In other words, they are expected to pay their way; they are self-liquidating. On the other hand, loans raise for war or protection against natural disaster do not create any asset; they are dead weight and are regarded as unproductive.

· Short-term and Long-term debt: Short-term loans are repayable after short interval of time, e.g. treasury bills payable after three months, ways and means advances from the central bank. They are intended to bridge the gap temporarily between current revenue and current expenditure. It is also called unfunded debt Long-term loans are payable after a long time covering several years. They are also called funded debt.

· Redeemable and Irredeemable debt: If government takes loan to pay at the specified time, it is called redeemable debt. On the other hand, if government takes loan to pay the specified interest for a long time but does not promise to pay the principal at specified time, it is called irredeemable debt.

· Compulsory and Voluntary debt: If government takes loan from the public forcefully, it is called compulsory debt. Government mainly takes this type of loan at the time of war and natural disaster. If public gives loan to the government voluntarily. It is called voluntary loan. For example, buying prize bond, national defense certificate, savings certificate etc.

Differences between Public and Private Debts:

No.

Particulars

Public Debt

Private Debt

1

Burden of debt

Burden of public debt is not imposed directly on Government. Government collects it from the public of the country

Burden of individual debt is directly imposed on individual

2

Borrow money

Government can borrow from the citizens forcefully

Individual can borrow if the lender wishes to lend him/her

3

Benefit

Public will get benefit if they lend money to Government

Lender will not get any benefit from borrower if he/she lends money to any individual

4

Issue of note

If necessary, Government can issue notes to pay debt

There is no scope to issue note in case of individual

5

Payment of debt

Generally. Government imposes tax on public to pay debt

Individual has to pay debt from his/her income

6

Types of debt

Government can borrow from both internal and external sources

Individual can only borrow from external source

7

Irredeemable debt

Government can borrow money on irredeemable basis

Individual has to borrow money on redeemable basis

8

Interest rate on debt

Interest rate on debt is less in case of public debt

Interest rate on debt is more in case of individual debt

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