A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector.
Changes in government debt over time reflect primarily borrowing due to past
government deficit
The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a ''g ...
s.
A deficit occurs when a government's expenditures exceed revenues.
Government debt may be owed to domestic residents, as well as to foreign residents. If owed to foreign residents, that quantity is included in the country's
external debt
A country's gross external debt (or foreign debt) is the liabilities that are owed to nonresidents by residents. The debtors can be governments, corporations or citizens. External debt may be denominated in domestic or foreign currency. It inclu ...
.
In 2020, the value of government debt worldwide was $87.4 US trillion, or 99% measured as a share of
gross domestic product
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is oft ...
(GDP).
Government debt accounted for almost 40% of all debt (which includes corporate and household debt), the highest share since the 1960s.
The rise in government debt since 2007 is largely attributable to the global
financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
, and the
COVID-19 pandemic
The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identi ...
.
The ability of government to issue debt has been central to
state formation
State formation is the process of the development of a centralized government structure in a situation where one did not exist prior to its development. State formation has been a study of many disciplines of the social sciences for a number of ...
and to
state building.
Public debt has been linked to the rise of
democracy
Democracy (From grc, δημοκρατία, dēmokratía, ''dēmos'' 'people' and ''kratos'' 'rule') is a form of government in which people, the people have the authority to deliberate and decide legislation ("direct democracy"), or to choo ...
, private
financial markets
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial ma ...
, and modern
economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
.
Measuring government debt
Government debt is typically measured as the ''gross debt'' of the ''general government'' sector that is in the form of liabilities that are debt instruments.
A ''debt instrument'' is a financial claim that requires payment of interest and/or principal by the debtor to the creditor in the future. Examples include debt securities (such as
bonds and bills), loans, and government employee pension obligations.
International comparisons usually focus on ''general government'' debt because the level of government responsible for programs (for example, health care) differs across countries and the general government comprises central, state, provincial, regional, local governments, and social security funds.
The debt of public corporations (such as post offices that provide goods or services on a market basis) is not included in general government debt, following the International Monetary Fund's ''Government Finance Statistics Manual 2014'' (''GFSM''), which describes recommended methodologies for compiling debt statistics to ensure international comparability.
The ''gross debt'' of the general government sector is the total liabilities that are debt instruments. An alternative debt measure is ''net debt'', which is gross debt minus financial assets in the form of debt instruments.
Net debt estimates are not always available since some government assets may be difficult to value, such as loans made at concessional rates.
Debt can be measured at ''market value'' or ''nominal value''. As a general rule, the ''GFSM'' says debt should be valued at ''market value'', the value at which the asset could be exchanged for cash.
However, the ''nominal value'' is useful for a debt-issuing government, as it is the amount that the debtor owes to the creditor.
If market and nominal values are not available, ''face value'' (the undiscounted amount of principal to be repaid at maturity)
is used.
A country's general government debt-to-GDP ratio is an indicator of its debt burden since
GDP
Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is ofte ...
measures the value of goods and services produced by an economy during a period (usually a year). As well, debt measured as a percentage of GDP facilitates comparisons across countries of different size. The
OECD
The Organisation for Economic Co-operation and Development (OECD; french: Organisation de coopération et de développement économiques, ''OCDE'') is an intergovernmental organisation with 38 member countries, founded in 1961 to stimulate e ...
views the general government debt-to-GDP ratio as a key indicator of the sustainability of government finance.
Causes of government debt accumulation
An important reason governments borrow is to act as an economic "shock absorber". For example, deficit financing can be used to maintain government services during a recession when tax revenues fall and expenses rise (for unemployment benefits, say).
Government debt created to cover costs from major shock events can be particularly beneficial. Such events would include a major war, like
World War II
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
; a public health emergency like the
COVID-19 pandemic
The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identi ...
; or a severe economic downturn as with the
financial crisis of 2007–2008
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
.
In the absence of debt financing, when revenues decline during a downturn, a government would need to raise taxes or reduce spending, which would exacerbate the negative event.
While government borrowing may be desirable at times, a "deficits bias" can arise when there is disagreement among groups in society over government spending.
To counter deficit bias, many countries have adopted
balanced budget rules or restrictions on government debt. Examples include the "debt anchor"
in Sweden; a
"debt brake" in Germany and
Switzerland
). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
; and the
European Union
The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...
's
Stability and Growth Pact
The Stability and Growth Pact (SGP) is an agreement, among all of the 27 member states of the European Union, to facilitate and maintain the stability of the Economic and Monetary Union (EMU). Based primarily on Articles 121 and 126 of the Trea ...
agreement to maintain a general government gross debt of no more than 60% of GDP.
Historic benchmarks
![Bank of England Charter sealing 1694](https://upload.wikimedia.org/wikipedia/commons/0/09/Bank_of_England_Charter_sealing_1694.jpg)
The ability of government to issue debt has been central to
state formation
State formation is the process of the development of a centralized government structure in a situation where one did not exist prior to its development. State formation has been a study of many disciplines of the social sciences for a number of ...
and to
state building.
Public debt has been linked to the rise of
democracy
Democracy (From grc, δημοκρατία, dēmokratía, ''dēmos'' 'people' and ''kratos'' 'rule') is a form of government in which people, the people have the authority to deliberate and decide legislation ("direct democracy"), or to choo ...
, private
financial markets
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial ma ...
, and modern
economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
.
For example, in the 17th and 18th centuries England established a parliament that included creditors, as part of a larger coalition, whose authorization had to be secured for the country to borrow or raise taxes. This institution improved England's ability to borrow because lenders were more willing to hold the debt of a state with democratic institutions that would support debt repayment, versus a state where the monarch could not be compelled to repay debt.
As public debt came to be recognized as a safe and liquid investment, it could be used as collateral for private loans. This created a complementarity between the development of public debt markets and private financial markets.
Government borrowing to finance public goods, such as urban infrastructure, has been associated with modern
economic growth
Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...
.
Written records point to public borrowing as long as two thousand years ago when Greek city-states such as Syracuse borrowed from their citizens.
But the founding of the
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the English Government's banker, and still one of the bankers for the Government of ...
in 1694 revolutionised public finance and put an end to defaults such as the ''
Great Stop of the Exchequer
The Great Stop of the Exchequer or Stop of the Exchequer was a repudiation of state debt that occurred in England in 1672 under the reign of Charles II of England.
The stop and its causes
Under Charles II the state finances were in such a grievous ...
'' of 1672, when
Charles II had suspended payments on his bills. From then on, the British Government would never fail to repay its creditors. In the following centuries, other countries in Europe and later around the world adopted similar financial institutions to manage their government debt.
![National-Debt-Gillray](https://upload.wikimedia.org/wikipedia/commons/3/32/National-Debt-Gillray.jpeg)
In 1815, at the end of the
Napoleonic Wars
The Napoleonic Wars (1803–1815) were a series of major global conflicts pitting the French Empire and its allies, led by Napoleon I, against a fluctuating array of European states formed into various coalitions. It produced a period of Fren ...
, British government debt reached a peak of more than 200% of GDP,
[UK public spending](_blank)
Retrieved September 2011 nearly 887 million pounds sterling.
The debt was paid off over 90 years by running
primary budget surpluses (that is, revenues were greater than spending after payment of interest).
In 1900, the country with the most total debt was France (£1,086,215,525), followed by Russia (£656,000,000) then the United Kingdom (£628,978,782);
[ on a per-capita basis, the highest-debt countries were New Zealand (£58 12s. per person), the Australian colonies (£52 13s.) and Portugal (£35).][
In 2018, global government debt reached the equivalent of $66 trillion, or about 80% of global GDP, and by 2020, global government debt reached $87US trillion, or 99% of global GDP.] The COVID-19 pandemic caused public debt to soar in 2020, particularly in advanced economics that put in place sweeping fiscal measures.
Impacts of government debt
Government debt accumulation may lead to a rising interest rate, which can crowd out private investment as governments compete with private firms for limited investment funds. Some evidence suggests growth rates are lower for countries with government debt greater than around 80 percent of GDP. A World Bank Group report that analyzed debt levels of 100 developed and developing countries from 1980 to 2008 found that debt-to-GDP ratios above 77% for developed countries (64% for developing counties) reduced future annual economic growth by 0.017 (0.02 for developing countries) percentage points for each percentage point of debt above the threshold.
Excessive debt levels may make governments more vulnerable to a debt crisis
Debt crisis is a situation in which a government (nation, state/province, county, or city etc.) loses the ability of paying back its governmental debt. When the expenditures of a government are more than its tax revenues for a prolonged period, th ...
, where a country is unable to make payments on its debt, and it cannot borrow more. Crises can be costly, particularly if a debt crisis is combined with a financial/banking crisis which leads to economy-wide deleveraging
At the micro-economic level, deleveraging refers to the reduction of the leverage ratio, or the percentage of debt in the balance sheet of a single economic entity, such as a household or a firm. It is the opposite of leveraging, which is the prac ...
. As firms sell assets to pay off debt, asset prices fall which risks an even greater fall in incomes, further depressing tax revenue and requiring governments to drastically cut government services. Examples of debt crises include the Latin American debt crisis
The Latin American debt crisis ( es, Crisis de la deuda latinoamericana; pt, Crise da dívida latino-americana) was a financial crisis that originated in the early 1980s (and for some countries starting in the 1970s), often known as ''La Décad ...
of the early 1980s, and Argentina's debt crisis in 2001. To help avoid a crisis, governments may want to maintain a "fiscal breathing space". Historical experience shows that room to double the level of government debt when needed is an approximate guide.
Government debt is built up by borrowing when expenditure exceeds revenue, so government debt generally creates an ''intergenerational transfer.'' This is because the beneficiaries of the government's expenditure on goods and services when the debt is created typically differ from the individuals responsible for repaying the debt in the future.
An alternative view of government debt, sometimes called the Ricardian equivalence
The Ricardian equivalence proposition (also known as the Ricardo–de Viti–Barro equivalence theorem) is an economic hypothesis holding that consumers are forward-looking and so internalize the government's budget constraint when making their co ...
proposition, is that government debt has no impact on the economy if individuals are altruistic and internalize the impact of the debt on future generations. According to this proposition, while the quantity of government purchases affects the economy, debt financing will have the same impact as tax financing because with debt financing individuals will anticipate the future taxes needed to repay the debt, and so increase their saving and bequests by the amount of government debt. Such higher individual saving means, for example, that private consumption falls one-for-one with the rise in government debt, so the interest rate would not rise and private investment is not crowded out.
Risk
Credit (Default) risk
Historically, there have been many cases where governments have defaulted on their debts, including Spain in the 16th and 17th centuries, which nullified its government debt several times; the Confederate States of America
The Confederate States of America (CSA), commonly referred to as the Confederate States or the Confederacy was an unrecognized breakaway republic in the Southern United States that existed from February 8, 1861, to May 9, 1865. The Confeder ...
, whose debt was not repaid after the American Civil War
The American Civil War (April 12, 1861 – May 26, 1865; also known by other names) was a civil war in the United States. It was fought between the Union ("the North") and the Confederacy ("the South"), the latter formed by states th ...
; and revolutionary Russia after 1917, which refused to accept responsibility for Imperial Russia's foreign debt.
If government debt is issued in a country's own fiat money
Fiat money (from la, fiat, "let it be done") is a type of currency that is not backed by any commodity such as gold or silver. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometime ...
, it is sometimes considered risk free because the debt and interest can be repaid by money creation
Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region,Such as the Eurozone or ECCAS is increased. In most modern economies, money creation is controlled by the central bank ...
. However, not all governments issue their own currency. Examples include sub-national governments, like municipal, provincial, and state governments; and countries in the eurozone
The euro area, commonly called eurozone (EZ), is a currency union of 19 member states of the European Union (EU) that have adopted the euro (€) as their primary currency and sole legal tender, and have thus fully implemented EMU policies ...
. In the Greek government-debt crisis
Greece faced a sovereign debt crisis in the aftermath of the financial crisis of 2007–2008. Widely known in the country as The Crisis ( Greek: Η Κρίση), it reached the populace as a series of sudden reforms and austerity measures that ...
, one proposed solution was for Greece to leave the eurozone and go back to issuing the drachma[M. Nicolas J. Firzli, "Greece and the Roots the EU Debt Crisis" ''The Vienna Review'', March 2010] (although this would have addressed only future debt issuance, leaving substantial existing debt denominated in what would then be a foreign currency).
Debt of a sub-national government is generally viewed as less risky for a lender if it is explicitly or implicitly guaranteed by a regional or national level of government. When New York City declined into what would have been bankrupt status during the 1970s, a bailout
A bailout is the provision of financial help to a corporation or country which otherwise would be on the brink of bankruptcy.
A bailout differs from the term ''bail-in'' (coined in 2010) under which the bondholders or depositors of global sys ...
came from New York State and the United States national government. U.S. state and local government debt is substantial — in 2016 their debt amounted to $3 trillion, plus another $5 trillion in unfunded liabilities.
Inflation risk
A country that issues its own currency may be at low risk of default in local currency, but if a central bank provides finance by buying government bonds (sometimes referred to as debt monetization
Debt monetization or monetary financing is the practice of a government borrowing money from the central bank to finance public spending instead of selling bonds to private investors or raising taxes. The central banks who buy government debt, are ...
), this can lead to price inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...
. In an extreme case, in the 1920s Weimar Germany suffered from hyperinflation when the government used money creation to pay off the national debt following World War I
World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, the United States, and the Ottoman Empire, with fightin ...
.
Exchange rate risk
While U.S. Treasury bonds denominated in U.S. dollars may be considered risk-free to an American purchaser, a foreign investor bears the risk of a fall in the value of the U.S. dollar relative to their home currency. A government can issue debt in foreign currency to eliminate ''exchange rate risk'' for foreign lenders, but that means the borrowing government then bears the exchange rate risk. Also, by issuing debt in foreign currency, a country cannot erode the value of the debt by means of inflation. Almost 70% of all debt in a sample of developing countries from 1979 through 2006 was denominated in U.S. dollars.
Implicit and contingent liabilities
Most governments have ''contingent liabilities'', which are obligations that do not arise unless a particular event occurs in the future. An example of an ''explicit'' contingent liability is a public sector loan guarantee, where the government is required to make payments only if the debtor defaults. Examples of ''implicit'' contingent liabilities include ensuring the payment of future social security pension benefits, covering the obligations of subnational governments in the event of a default, and spending for natural disaster relief.
Explicit contingent liabilities and net implicit social security obligations should be included as memorandum items to a government's balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
, but they are not included in government debt because they are not contractual obligations. Indeed, it is not uncommon for governments to change unilaterally the benefit structure of social security schemes, for example (e.g., by changing the circumstances under which the benefits become payable, or the amount of the benefit). In the U.S. and in many countries, there is no money earmarked for future social insurance payments — the system is called a '' pay-as-you-go'' scheme. According to the 2018 annual reports from the trustees for the U.S. Social Security and Medicare trust funds, Medicare is facing a $37 trillion unfunded liability over the next 75 years, and Social Security is facing a $13 trillion unfunded liability over the same time frame. Neither of these amounts are included in the U.S. gross general government debt, which in 2020 was $28 trillion.
In 2010 the European Commission
The European Commission (EC) is the executive of the European Union (EU). It operates as a cabinet government, with 27 members of the Commission (informally known as "Commissioners") headed by a President. It includes an administrative body o ...
required EU Member Countries to publish their debt information in standardized methodology, explicitly including debts that were previously hidden in a number of ways to satisfy minimum requirements on local (national) and European (Stability and Growth Pact
The Stability and Growth Pact (SGP) is an agreement, among all of the 27 member states of the European Union, to facilitate and maintain the stability of the Economic and Monetary Union (EMU). Based primarily on Articles 121 and 126 of the Trea ...
) level.
See also
Government finance:
* Debt crisis
Debt crisis is a situation in which a government (nation, state/province, county, or city etc.) loses the ability of paying back its governmental debt. When the expenditures of a government are more than its tax revenues for a prolonged period, th ...
* Government bond
A government bond or sovereign bond is a form of bond issued by a government to support public spending. It generally includes a commitment to pay periodic interest, called coupon payments'','' and to repay the face value on the maturity date ...
* Municipal bond
A municipal bond, commonly known as a muni, is a Bond (finance), bond issued by state or local governments, or entities they create such as authorities and special districts. In the United States, interest income received by holders of municipal ...
* Government budget deficit
The government budget balance, also alternatively referred to as general government balance, public budget balance, or public fiscal balance, is the overall difference between government revenues and spending. A positive balance is called a '' ...
* Government spending
Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual o ...
* Generational accounting
Generational accounting is a method of measuring the fiscal burdens facing current and future generations. Generational accounting considers how much each adult generation, on a per person basis, is likely to pay in future taxes net of transfer p ...
* Financial repression
Financial repression comprises "policies that result in savers earning returns below the rate of inflation" to allow banks to "provide cheap loans to companies and governments, reducing the burden of repayments." It can be particularly effective a ...
* Fiscal policy
In economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables ...
* Public finance
Public finance is the study of the role of the government in the economy. It is the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achie ...
* Debt clock
A debt clock is a public counter, which displays the government debt (also known as ''public debt'' or ''national debt'') of a public corporation, usually of a state, and which visualizes the progression through an update every second. Because of ...
* Sovereign default
A sovereign default is the failure or refusal of the
government of a sovereign state to pay back its debt in full when due. Cessation of due payments (or receivables) may either be accompanied by that government's formal declaration that it wi ...
* Sovereign credit
Sovereign credit is the Credit (finance), credit of a sovereign country backed by the financial resources of that state. Sovereign credit is the opposite of sovereign debt. Fiat money is sovereign credit and sovereign bonds are sovereign debts. ...
* Tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
Specific:
* 1980s austerity policy in Romania
In the 1980s, severe austerity measures were imposed in the Socialist Republic of Romania by President Nicolae Ceaușescu in order to pay out the external debt incurred by the state in the 1970s. Beginning in 1981, the austerity led to economic s ...
* Latin American debt crisis
The Latin American debt crisis ( es, Crisis de la deuda latinoamericana; pt, Crise da dívida latino-americana) was a financial crisis that originated in the early 1980s (and for some countries starting in the 1970s), often known as ''La Décad ...
* European debt crisis
The European debt crisis, often also referred to as the eurozone crisis or the European sovereign debt crisis, is a multi-year debt crisis that took place in the European Union (EU) from 2009 until the mid to late 2010s. Several eurozone membe ...
* National debt of the United States
The national debt of the United States is the total national debt owed by the federal government of the United States to Treasury security holders. The national debt at any point in time is the face value of the then-outstanding Treasury sec ...
General:
* Bond (finance)
In finance, a bond is a type of security under which the issuer ( debtor) owes the holder ( creditor) a debt, and is obliged – depending on the terms – to repay the principal (i.e. amount borrowed) of the bond at the maturity date as well a ...
* Credit default swap
A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event. That is, the seller of the CDS insures the buyer against som ...
* Warrant (of Payment)
* List of countries by credit rating
This is a list of countries by credit rating, showing long-term foreign currency credit ratings for sovereign bonds as reported by the largest three major credit rating agencies: Standard & Poor's, Fitch, and Moody's. The list also includes all ...
* List of countries by external debt
This is a list of countries by external debt, it is the total public and private debt owed to nonresidents repayable in internationally accepted currencies, goods or services, where the public debt is the money or credit owed by any level of gov ...
* List of countries by net international investment position
* List of countries by public debt
Below is a list of countries and territories by government debt , public debt (also called government debt or sovereign debt). ''Gross'' government debt is government financial liabilities that are debt instruments. A ''debt instrument'' is a f ...
* World debt The global debt is 305 trillion US $ in 2022, including debt by public and private debtors. (A trillion is defined here as a million millions, or 1012.)
This debt consists of
* 23% private household debt
* 38% private debt of non-financial corporat ...
References
External links
The IMF Public Financial Management Blog
OECD government debt statistics
Riksgäldskontoret – Swedish national debt office
What is Sovereign Debt
United States Treasury, Bureau of Public Debt – The Debt to the Penny and Who Holds It
* ttps://fraser.stlouisfed.org/theme/71 A historical collection of documents on or referring to government spending and fiscal policy available on FRASER
*
*
US Debt Clock
;Databases
CLYPS dataset on public debt level and composition in Latin America
{{DEFAULTSORT:Government Debt
Fiscal policy