What is public debt?

Public debt, also known as public debt, is any money or credit owed by any level of government. This includes debt owed to domestic creditors as well as to foreign banks or other countries. Understanding government debt is a good way to understand a nation's economy within a global context; countries with higher levels of public debt are often at risk of serious economic problems if recessions or fiscal emergencies occur.

Many people do not realize that public debt is indirectly the responsibility of citizens. In fact, the public pays off most debts incurred through taxes or by purchasing government-issued bonds and bonds. A government bond is generally considered an excellent investment, thanks to favorable interest rates and low risk rates. By purchasing bonds, the public is financing the payment of government debt, whether national or municipal.

There are many reasons why a government might incur debt. Some of the oldest examples of government debt date back to the wars between England and France in the Middle Ages. War is often a reason for rising public debt, but simple expansion and provision for citizens are even more common reasons. Just as a family can take out a home loan with the idea that it will continue to maintain its income and thus pay off debts eventually, governments will also go into debt to provide and expand their services and economy.

Whether or not taking on government debt is a good idea is the subject of much debate among economists. In classical Keynesian theory, a certain amount of debt is acceptable as long as it is used to stimulate the national economy. Other theories suggest that a country should not grow faster than its resources allow and advise against incurring public debt.

Many agree that there is considerable danger if public debt becomes overwhelming. In critical situations, governments failed to pay their debts or refused to make payments after the government was overthrown. The aftermath of the 2008 global financial crisis has put the government's debt problems into absolute relief, particularly in the country of Greece. Huge levels of public debt combined with an uncompetitive market, falling gross domestic product (GDP) and an inability to devalue its currency have brought this once-thriving nation to the brink of bankruptcy.

The amount of public debt of a country is usually measured by the debt to GDP ratio. The European Union declared at the formation of the euro zone that a country could not become a member of the zone unless it held public debt of less than 60% of its GDP. According to 2009 statistics, Greece maintained a debt-to-GDP ratio of 113.4%, the United States had 52.9% and Mozambique had the lowest public debt with a ratio of 3.7%.

It is important to remember that regional and local governments can also incur public debt. Although usually on a smaller scale, this type of government debt can still have major effects on a nation's economy. If a city or state government cannot repay its debt, the national government may have to bail them out, leading to additional government spending across the country.