Economic Bases for Public Debt:

Government borrowing may be justified on the following grounds.

(i). Capital formation: Debts can be translated into real capital stock which in turn enhance the growth of the economy.

(ii) Investment opportunities: The availability of public debt gives private investors, public corporation, state, and local government an opportunity to buy government securities which are virtually risk free (gilt-edge).

(iii) Stabilisation of the economy: A large public debt can serve as an automatic fiscal stabilizer. A good proportion of the public debt is by the banking system to control the supply of money.

(iv) Provision of development finance: Most development projects that are critical to the development of low income countries like those in West African sub-region e.g dams, water supply etc. are financed by external loans.