Public debt, often referred to as government debt or national debt, is the debt of a government owed to lenders. This can include money owed to individual citizens (such as holders of treasury bills and bonds issued by the government) or to other governments, businesses, or organizations. It also includes money owed as a result of government programs and entitlements, such as Social Security.
Public debt can become a major burden on a country’s economic growth, both directly, through the interest payments it must make, and indirectly, through the economic distortions it can create. Governments typically employ a variety of measures to finance their debt, including taxation, deficit spending, and borrowing. It is important to understand how a country manages its debt in order to make informed decisions about its economic outlook.
Public debt is generally divided into two categories: public debt held by the government itself and public debt held by others, often referred to as external debt. Public debt held by the government itself refers to money borrowed to finance activities or programs that are expected to produce a return in the future. This includes money borrowed to finance large-scale projects, such as infrastructure investments or defense spending, and money borrowed to cover shortfalls in other areas, such as social services and health care. Public debt held by others, meanwhile, refers to money borrowed by the government for these same activities, but from other governments, international organizations or the private sector.
The size and magnitude of a country’s public debt can vary significantly. In some countries, such as Japan and the United States, public debt is a large percentage of the gross domestic product (GDP); in other countries, it is relatively small. This is due in large part to the fiscal policies of the government in power. Countries with sound fiscal policies and robust economic growth tend to accumulate less public debt, while those with weaker fiscal policies may be more likely to accumulate more public debt. Additionally, countries with more progressive taxation (taxing higher earners at higher rates) usually carry higher levels of public debt.
Public debt can be classified as either public or external. Public debt is money a government borrows from its citizens and institutions within its borders. External debt, on the other hand, is money a government borrows from foreign lenders. The primary sources of government funding for public debt include taxes, deficit spending, and borrowing from foreign sources.
When a government borrows money, it must then repay the debt plus interest. The interest rate is determined by the government, though it is generally fixed to a market interest rate (such as the US Treasury Bill rate). The interest payments a government makes on its public debt are typically greater than the principal amount of the loan, as the principal amount is repaid over time.
Public debt can be an important tool for a government, as it can be used to finance public projects and programs that may not have been funded through other means. It can also be used to help stabilize the economy during periods of instability. However, if interest payments become too large or are not managed properly, public debt can become a burden on the economy, resulting in slower growth and a weaker currency. For this reason, governments must ensure that their fiscal policies are sound and that public debt levels are kept to an acceptable level.
