Consider the following statements about government debt:
(A) By borrowing, the government transfers the burden of reduced consumption on future generations.
(B) Government borrowing from the people raises the savings available to the private sector.
(C) Traditionally, it has been argued that consumers spend more when the government cuts taxes and runs a deficit.
(D) Ricardian equivalence argues that taxation and borrowing are equivalent means of financing expenditure.
(E) Debt owed to foreigners involves no burden, since purchasing power remains within the nation.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (C) and (D) only
(A) By borrowing, the government transfers the burden of reduced consumption on future generations. — Correct. Bonds are repaid later by taxes on future workers.
(B) Government borrowing from the people raises the savings available to the private sector. — Incorrect. It reduces the savings left for the private sector.
(C) Traditionally, it has been argued that consumers spend more when the government cuts taxes and runs a deficit. — Correct. They respond to the higher after-tax income.
(D) Ricardian equivalence argues that taxation and borrowing are equivalent means of financing expenditure. — Correct. That is why it is called ‘equivalence’.
(E) Debt owed to foreigners involves no burden, since purchasing power remains within the nation. — Incorrect. Debt owed to foreigners is a burden: goods must be sent abroad to pay the interest.
NCERT (2026-27): “Perspectives on the Appropriate Amount of Government Debt: … By borrowing, the government transfers the burden of reduced consumption on future generations. … Also, government borrowing from the people reduces the savings available to the private sector. … Traditionally, it has been argued that when a government cuts taxes and runs a budget deficit, consumers respond to their after-tax income by spending more. … This view is called Ricardian equivalence after one of the greatest nineteenth century economists, David Ricardo, who first argued that in the face of high deficits, people save more. It is called ‘equivalence’ because it argues that taxation and borrowing are equivalent means of financing expenditure. … It has often been argued that ‘debt does not matter because we owe it to ourselves’. This is because although there is a transfer of resources between generations, purchasing power remains within the nation. However, any debt that is owed to foreigners involves a burden since we have to send goods abroad corresponding to the interest payments.” |