Theory of Public Debt:

Expenditures of the government have increased rapidly during recent decades despite role of state in economic activities decreasing considerably. However there are limits to which revenues from taxes can be raised to meet continuous increasing expenditures. Government needs to borrow when current revenue receipts fall short of public expenditure. Governments usually borrows by issuing securities such as government bonds and bills. As mentioned in Encyclopedia Britannica, public debt refers to "Obligations of  governments, particularly those evidenced by securities to pay certain sums to the holders at some future date." P E Taylor  has defined public debt as " Government debt arises out of borrowing by the treasury from banks,business organisations and   individuals.The debt is in the form of promises by the treasury to pay the holders of these promises aprincipal sum and in most instances interest on the principal. Borrowing is resorted to in order to provide funds for financing a current deficit." The borrowing  of the government may be from within the country or from outside the country or both. Public debt can be categorised as internal debt, owed to lenders within the country, and external debt owed to foreign lenders. Another common division of government debt is by duration.Short term debt is generally considered to be one year or less, long term is more than ten years. Medium term debt falls in  the middle.

Public debt or public borrowing is an instrument of fiscal policy. The purpose of borrowing may not always be for obtaining revenue resources only. It may be for influencing aggregate demand, i.e. to influence the investment and consumption expenditures for maintaining stability in the economy. Modern wars and growth of defense expenditure have also led to increase in public  expenditure and therefore increase in public debt.