Ricardo and Modern Public Debt Theory

Abstract

The subject of public debt is very much in the news today. In almost every industrialized economy, governments are seeking to rein in budget deficits that have ballooned in recent years, and those that have met with success must decide whether to apply budget surpluses to the reduction of the public debt. There is still no clear consensus among politicians or economists on fundamental questions of public finance such as those outlined by Fetter above. Supporters of large scale government spending and the need for deficit spending in certain situations point to their substantial economic benefits. Their opponents warn of the danger to the economy that can arise as a result of such policies. Both positive and normative arguments made in the current policy debate bear strong resemblance to those made in Ricardo's day. However, the evolution of economic analysis since Ricardo's day has contributed to complicate the discussion of the effects of public borrowing and public debt. What follows is a brief evaluation of the reasoning of current thinkers regarding such issues as the impact of public borrowing on economic growth, the unproductive nature of government expenditure, and the harmful impact of debt-service taxation on resource allocation. The aim is to emphasize some of the major developments in public debt theory since Ricardo, showing that his work on public debt was an important step in the evolution of modern public finance theory and is still highly relevant today.1