The public debt may be classified as under
1. Internal and External debt:
• Amount borrowed from within the country and the lenders may be individuals, groups, banks, non-banking companies and others companies willing to invest at higher profits. External debt is owed to the foreign government or institutions.
2. Short-term & Long-Term debt:
• Short-term debt is paid within 12 months e.g. treasury bills payable after 3 months, ways and means advances from central bank. They are usually taken to cure the difference between current expenditure and current revenue. Also called floating debt.
• Long-term loans are payable after a period of more than 1 year. Also called funded debt. Example includes long-term loan. Mortgage from bank.
3. Productive and unproductive:
• The productive debt is expected to create assets which will yield income to sufficient to pay the principal. In other words, they are expected top pay their way: they are self liquidating. For example if government takes loan and invest to encourage education, such a loan will be proved effective and productive. Another case may be that government takes loan and establish industry for producing value added goods; this is also a productive loan. On the other hand loans raised for war do not create any asset; they are deadweight and regarded as unproductive. Funds borrowed for reconstruction after war or panics also prove expensive for an economy.
Public debt refers to the borrowing of the government from within the country or from abroad, from private individuals or from association of individuals or from banking or non-banking financial institution. Government borrows money in order to finance the expenditures. The need for public debt arises when there is budget deficit i.e. when expenditure of the government gets bigger than government income. Government just acting as debtor discharge the amount and pays the interest rate agreed on loan. In the world developing countries are taking loans for buying technology and especially for industrialization. The amount borrowed is invested in viable projects so that it fulfills the goals of the government and justifies the finance cost