Impact of Internal Public Debt:

The public debt of a country affects its economy in two ways. It has its 'revenue effects' as well as 'expenditure effects' In the first place, its raising of money by a loan makes the people change their budgets. Though, it may not affect the consumption expenditure directly as the taxation does, because people use their past or present saving to buy the public securities. But in some cases they may increase their savings and cut down their current expenditure to buy the loan. Obviously public debts affect consumption expenditure. This is therefore, the first effect of public debt.

Secondly, the benefit, conferred upon the people by the expenditure of the money raised through public loans, is the effect of public debt. These benefits may not always be different from the benefit that expenditure of tax income may confer, provided that the same use is made of borrowed money as is made of tax revenue. But except in rare cases, borrowed money is always used in different ways so that of tax revenue. However the difference is not always very radical. For instance, tax revenue may be used to pay the salaries of teachers, while borrowed money may be utilized for the construction of school buildings. The effects of spending, the  proceeds of taxation and of borrowings are the same. But in some cases, the difference is clear-cut. The borrowed funds are used to finance expenditure of capital nature, such as for the construction of plants for generating the atomic energy, whereas the tax proceeds are used to finance current revenue expenditure, the effects of former expenditure are different to that of latter. Let us now discuss the effects of public debt on consumption, production, distribution and on private sector.