Total indebtedness of a government, especially as evidenced by securities issued to investors. The national debt grows whenever the government operates a budget deficit—that is, when government spending exceeds government revenues in a year. To finance its debt, the government can issue securities such as bonds or treasury bills. The level of national debt varies from country to country, from less than 10percnt of the gross domestic product (GDP) to more than double it. Public borrowing is thought to have an inflationary effect on the economy and thus is often used during recessions to stimulate consumption, investment, and employment. Seealso deficit financing; John Maynard Keynes.
Learn more about national debt with a free trial on Britannica.com.
As the government represents the people, government debt can be seen as an indirect debt of the taxpayers. The government accumulates debt over time by running a deficit: that is, by spending more than it taxes.
Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Governments usually borrow by issuing securities such as government bonds and bills. Less credit worthy countries sometimes borrow directly from commercial banks or supranational institutions. Some consider all government liabilities, including future pension payments and payments for goods and services the government has contracted for but not yet paid, as government debt.
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 between these two boundaries.
A government bond is a bond issued by a national government denominated in the country's domestic currency. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds. Government bonds are theoretically risk-free bonds, because the government can raise taxes, reduce spending, or simply print more money to redeem the bond at maturity. Investors in sovereign bonds have the additional risk that the issuer is unable to obtain foreign currency to redeem the bonds.
A politically unstable state is anything but risk-free as it may, being sovereign, cease its payments with impunity. Famous examples of this phenomenon include the Spain of sixteenth and seventeenth centuries which nullified its government debt seven times during a century and revolutionary Russia of 1917 which refused to accept the responsibility for Imperial Russian debt. Another political risk is caused by external threats. It is most uncommon for invaders to accept responsibility for the national debt of the annexed state or that of an organization it considered a rebellion. For example, all debts taken by Confederate States of America were left unpaid after the American Civil War.
U.S. Treasury bonds denominated in U.S. dollars are often considered "risk free" in the U.S. but this ignores the risk to foreign purchasers of currency exchange rate movements. In addition, this implicitly accepts the stability of the US government and its ability to continue repayments in a financial crisis.
Lendings to a national government in a currency other than its own does not allow for the same confidence in the ability to repay but this is offset somewhat by reducing the exchange rate risk to foreign lenders. On the other hand, national debt in foreign currency cannot be disposed of by starting a hyperinflation, which increases the credibility of the debtor. Usually small states with volatile economies have most of their national debt in foreign currency. For countries in the Eurozone, the euro is the local currency, although no single state can trigger inflation by creating more currency.
Lendings to a local or municipal government can be just as risky as a loan to a private company, unless the local or municipal government has the power to tax. In this case, the local government can escape its debts by increasing the taxes, or reduce spending, just as a national one. Local government loans are sometimes guaranteed by the national government and this reduces the risk. In some jurisdictions, interest earned on local or municipal bonds is tax-exempt income, which can be an important consideration for the wealthy.
Public debt clearing standards are set by the Bank for International Settlements, but defaults are governed by extremely complex laws which vary from jurisdiction to jurisdiction. Globally, the International Monetary Fund has the power to intervene to prevent anticipated defaults. It has been very heavily criticized for the measures it advises nations to take, which often involve cutting back essential services as part of an economic austerity regime. In triple bottom line analysis, this can be seen as degrading capital on which the nation's economy ultimately depends.
Private debt, by contrast, has a relatively simple and far less controversial model: credit risk (or the consumer credit rating) determines interest rate, more or less, and entities go bankrupt if they fail to repay. Governments cannot really go bankrupt (and suddenly stop providing services to citizens), thus a far more complex way of managing defaults is required.
Smaller jurisdictions, such as cities, are usually guaranteed by their regional or national levels of government. When New York City over the 1960s declined into what would have been a bankrupt status (had it been a private entity) by the early 1970s, a "bailout" was required from New York State and the United States. In general such measures amount to merging the smaller entity's debt into that of the larger entity and thereby gaining it access to the lower interest rates the large one enjoys. The larger entity may then assume some agreed-upon oversight in order to prevent recurrence of the problem.
It is highly unlikely that a government which defaults will be foreclosed upon; however, it is theoretically possible.
As this theory gained popularity in the 1930s globally, many nations took on public debt to finance large infrastructural capital projects — such as highways or large hydroelectric dams. It was thought that this could start a virtuous cycle and a rising business confidence since there would be more workers with money to spend. Some have argued that the greatly increased military spending of World War II really ended the Great Depression. Of course, military expenditures are based upon the same tax (or debt) and spend fundamentals as the rest of the federal budget, so this argument does little to undermine Keynesian theory. Indeed, some have suggested that significantly higher national spending necessitated by war essentially confirms the basic Keynesian analysis (see Military Keynesianism). (There is much debate as to what exactly ended the Great Depression, in particular from Austrian Economics.)
Nonetheless, the Keynesian scheme remained dominant, thanks in part to Keynes' own pamphlet How to Pay for the War, published in his native United Kingdom in 1940. Since the war was being paid for, and being won, Keynes and Harry D. White, Assistant Secretary of the United States Department of the Treasury, were, according to John Kenneth Galbraith, the dominating influences on the Bretton Woods agreements. These agreements set the policies for the BIS, IMF, and World Bank, the so-called Bretton Woods Institutions, launched in the late 1940s.
These are the dominant economic entities setting policies regarding public debt. Due to their role in setting policies for trade disputes, the General Agreement on Tariffs and Trade (GATT) and World Trade Organization also have immense power to affect foreign exchange relations, as many nations are dependent on specific commodity markets for the balance of payments they require to repay debt.
Understanding the structure of public debt and analyzing its risk requires one to:
Global debt is of great concern since, very often, social capital is depleted (such as cases of pestilence or welfare services on families or friends), and natural capital is ravaged for "natural resources" to make interest payments.
This has led to calls for universal debt relief for poorer countries. A less extreme measure is to permit civil society groups in every nation to buy the debt in exchange for minority equity positions in community organizations. Even in dictatorships, the combination of banks and civil society power could force land reform and overthrow unaccountable governments, since the people and banks would be aligned against the oppressive government.
Creditary economics and Islamic economics argue that any level of debt by any party simply represents a violent and coercive relationship that must end. As the existing system of public debt finance based on Bretton Woods is critical to the financial architecture, significant monetary reform would be required to realize this.
Using a debt to GDP ratio is one of the most accepted measures of assessing a nation's debt. For example, one of the criteria of admission to the European Union's Euro currency is that a country's debt does not exceed 60% of that country's GDP.
The problem with the implicit government insurance liabilities is that it's very hard to make any accurate assumptions about these liabilities, since the scale of future payments depends on so many factors. First of all, the social security claims are not any "open" bonds or debt papers with a stated time frame, "time to maturity", "nominal value", or "net present value". In the United States there is no money in the governments coffers for social insurance payments, or for any payments, more than what's required to run day-to-day business. This insurance system is called PAYGO (pay-as-you-go) as opposed to save and invest. The fear is that when the "baby boomers" start to retire the working population in the United States will be a smaller percentage of the population than it is now, for a perhaps incalculable time into the future. This will make the government expenditures a "burden" on the country - larger than the 35% of GDP that it is now. Remember that the "burden" of the government is what it spends, since it can only pay its bills through taxes, debt, and inflation of the currency (government spending = tax revenues + change in government debt held by public + change in monetary base held by the public). "Government social benefits" paid by the United States government during 2003 totalled $1.3 trillion.