Classical Economists View on Public Debt
The classical school of thought considered that government debt was an
impediment to economic progress. They were a proponent of laissez-faire and
advocated a market economy. The individuals were characterized as rational
decision-makers who were far-sighted, unlike myopic individuals as assumed
by the Keynesian school. These individuals respond to real changes in their
wealth and plan their consumption behaviour over their entire life cycle.
• David Hume, a classical economist, was perhaps the first one to convey
his thoughts on public debt. In 1752, he said, “either the nation must
destroy public credit or public credit will destroy the nation.”
Accordingly, he was sceptical about the power vested in the hands of
creditors who could abuse the debtors. Public debt, according to him,
can pose adverse social-political consequences and is a threat to the
security of the state as it encourages an idle and useless rentier class
and oppresses the poorer class.
• J. B. Say made a distinction between private borrowing and
government borrowing. The purpose of private debt is to create
beneficial employment, whereas public debt creates barren production
and consumption, and the burden is transferred to future generations.
• Adam Smith (1776) held the view that ”The progress of the enormous
debts which at present oppress, and will in the long-run probably ruin,
all the great nations of Europe, has been pretty uniform.” He
considered the state as wasteful. Public debt takes away resources
from the private capitalist; the annual produce is directed towards
servicing of debt rather than capital formation and towards the
maintenance of unproductive labour.He argued that land and capital
would be burdened by the higher taxes imposed on service debt. Public
debt will lead to a transfer of resources to unproductive creditors, and
as a result, “the ruin of trade and manufacture will follow the
declension of agriculture.”
• He and Ricardo were concerned with the consequences of public debt-
the usage to which it was put. The consequence of debt is the
destruction of capital caused by it.
• Ricardo advocated a one-time capital levy as a means of redemption of
debt and use of tax revenues for the financing of the war. The aim
should be to be debt free within the period of three years. According to
him, a nation free from public debt will witness high private capital
formation and thus enjoy higher economic growth. A one-time tax in
the form of a capital levy will free the nation from the debt; otherwise,
a continuous tax burden will drive resources out of the economy and
thus discourages economic growth.
• Malthus also recognized the evils of public debt. He argued that high
debt and accompanying higher taxes are injurious to food production,
could lead to burdensome tax increases and tempt voters to default. He
recognized that disequilibrium exists in the market in the form of high
unemployment, poverty, disinflation, lower profits and economic
recession. However, he was not in complete agreement with Ricardo
regarding the levy of one-time tax. Rather he believed that it would
aggravate the economic problems. \
• John Stuart Mill (1848) was against public borrowing as it destroys
capital which otherwise could be used more productively. A country
should raise debt within acceptable limits. Accordingly, a country would
be spared from the evil effects of public debt if it pays it off expediently
through general contribution or out of the surplus revenue.The classical
theory on public debt took the best shape with the works of H. C.
Adams, C. F. Bastable, and P. Leroy-Beaulieu. They carefully analyzed
the effects of public debt. They made a clear distinction between the
creation of public debt and the effects of public expenditure.
• Adams argued that debt creation per se does not adversely affects the
lenders. According to him, “A loan calls for no immediate payment from
the people…. The lenders are satisfied since they have secured a good
investment.” He refuted the argument that the burden of expenditure
cannot be forwarded.
• Bastable stated that public credit is only one form of credit in general
and is governed by the same principles which control private credit.
Further, he made a distinction between loan finance and tax finance. “A
loan is voluntary and supplied by willing givers, taxation is levied on
the willing and unwilling alike to make things smooth for the present at
the cost of the future is not the duty of the wise and far-seeing
Statesman.” He believed that loans are made out of capital, and taxes
are paid out of new income. Both public debt and taxes affect income
as well as capital.
• Paul Leroy-Beaulieu made a clearer piece of the classical position on
public debt. He maintained an open position on public debt, i.e. neither
evil nor good. He condemned the classicists for ignoring the beneficial
aspect of public expenditure.
As he puts it, “a loan will be useful or harmful to the society, in general,
depending on whether the State preserves and usefully employs the
proceeds or wastes or destroys the capital which the rentiers have
given up.”
The following points summarize the dominant views held by the Classical on
Public Debt:
➢ Public debt leads to a reduction of resources for productive
private employment.
➢ Deficits were considered less harmful compared to current taxes,
and unbalanced budgets led to irresponsible government action
and unnecessary expansion of its activity.
➢ Future financing gets more troublesome due to public debt as
more funds out of the budget have to be spared for fixed charges
and by increasing the amount of taxes which must be paid to
service the debt.
➢ Currency depreciation and a rise in inflationary expectations are
caused by a rise in public debt.
➢ Public debt financing requires funds for interest payment and
amortization, hence a double burden for the exchequer.
Overall the Classists believed that an increase in fiscal deficit leads to
government dissaving and will have a detrimental impact on economic
growth if a rise in government dissaving is not fully matched rise in private
savings. In this scenario, overall savings in the economy gets reduced,
exerting pressure on interest rates.
The Classists were the proponents of no government intervention, and
markets clear automatically, so there is the full employment of resources.
This, in return, leads to a tax burden on future generations and a rise in
future consumption. Increased consumption means lesser savings in a closed
economy; external borrowings to finance national debt in case of an open
economy. External borrowing involves currency appreciation and a fall in
export earnings. Thus according to Classical debt theory, public debt leads to
declining national savings, investment, and exports but a rise in consumption.
