Modern governments need to borrow from different sources when current revenue falls short of public expenditures. Thus, public debt refers to loans incurred by the government to finance its activities when other sources of public income fail to meet the requirements.
Classification of public debts. Short-term public debts (floating debts) refer to debts up to 1 year. In short-term borrowing, treasury bills and treasury guaranteed bond are used. Medium-term public debts refer to debts ranging from 1 to 5 years.
The sources of public debt include: the Central Bank through ways and means advances; issuance of bonds; and the external or international sources.
Although public borrowing involves transfer of resources (from taxpayers to the lenders), the negative effect of taxes (i.e., desire to work less when taxes are increased) produce an unfavourable effect on income. Because of debt, present generation obtains less capital.