On Production and Distribution:

If people buy government securities by withdrawing money from industrial concerns, or by selling debentures and shares of industrial concerns, private investment is adversely affected. The net effect on investment will depend upon how the money is used by government. If the government utilizes this money in public undertakings, the total investment available for production may not be adversely affected, but if the government utilizes it on non-productive works, the total investment may be adversely affected.

If the people buy government securities from idle funds, private investment are not affected, but if they buy from bank deposits, private investment may be adversely affected, because the lending capacity of the bank may be reduced due to reduction in deposits.

The lending capacity of bank is generally elastic. The power of bank to create loans depends upon the policy of the central bank of the country. When the latter encourages for the creation of credit, the likelihood of the expansion of credit is immense. It can expand credit on the strength, of ad hoc or newly created securities. Thus the government borrowings may not reduce investment in private sector, provided there are enough funds for productive purposes. Moreover, the government will utilize the loans  proceeds for making the payments to contractors for goods and materials purchased and in paying salaries to its employees. This will release purchasing power and increase bank deposits, which can be utilized for making loans to private sector.

Hence, government borrowings from banks may not affect investment in private sector. If government uses the borrowed funds for unproductive purposes, it can only be repaid through additional taxation in future, and this additional taxation in future may affect consumption. Those utilized for the welfare schemes, increase the efficiency of the workers and that of production. When production increases, income of  community also increases, and hence, additional taxation may not affect consumption.
If the loans are utilized for productive purposes directly, they increase the income of the community. Hence, the consumption is not affected, but it increases. Moreover the interest along with principal can be paid out of increased income.

The purchaser of government securities are mostly the rich people of the community, But the burden of taxes, imposed for finding money for interest payments fall on the poorer classes also. Therefore the tendency of public debt would be to increase the inequalities of incomes. Hence the public debt may not have the desirable effects upon distribution. However, if bondholders and the tax are the same, then there will be no distribution of income. Therefore, the inequalities of income will not increase, but it is generally not true. Hence some redistribution of income will take place as long as the taxpayers and the bondholders belong to different groups, and as explained above, the inequalities of income may increase.

If public debt is utilized to provide more economic welfare to the lower income groups then the inequalities of income will decrease and a more equal distribution of income between different sections of the community would take place, However if the loan  finance created inflation, some of the good effects upon the distribution of income may be neutralized because of rise in prices. Thus, if the loan proceeds are spent on welfare schemes, the effects on distribution are whole-some.