Government debt

A country's government debt is the amount of money the government owes. This includes all the money it has borrowed over time. When a government's spending is more than its income, it creates a deficit, and this leads to more debt. This debt can be owed to people living inside the country or to people and organizations in other countries.

In 2020, the total government debt around the world was about US$87.4 trillion, which was almost 99% of the world's total economic output, called gross domestic product. This high level of debt is partly because of efforts to support the economy during the Great Recession and the COVID-19 recession.

Governments sometimes borrow money to help their country. This can let them spend money on important projects, avoid raising taxes too much, and support the economy during tough times. The ability to borrow has been important for countries as they grew and developed, helping create strong financial markets and support economic growth. Different groups, like banks, international organizations such as the World Bank, and other governments, lend money to countries that need it.

Measurement

Further information: List of countries by government debt

Government debt is the total amount of money a government owes. It is usually measured as the total debt of all government levels, including central, state, and local governments. This debt includes things like loans and bonds that must be paid back in the future.

When comparing debt between countries, people often look at the debt compared to the country’s total economic output, called GDP. This helps show how big the debt is compared to how much the country is producing. Some debts are not always counted in these totals, like future promises for pensions or help after natural disasters. These hidden debts can be very large and important for understanding a country’s full financial situation.

Causes of government debt accumulation

Governments sometimes borrow money to help during tough times. For example, they might borrow to keep services running when there is a recession, a big war like World War II, a health emergency like the COVID-19 recession, or a serious economic problem like the Great Recession. Without borrowing, a government might have to raise taxes or cut spending, which can make hard times even harder.

Sometimes, governments keep borrowing because different groups disagree about how to spend money. This can lead to too much debt over time. To prevent this, many countries have rules to control debt, such as balanced budget rules or limits on how much debt they can have compared to their total economy, like the European Union’s Stability and Growth Pact. Countries like Germany and Switzerland also have special rules to help manage their debt.

History

The ability of governments to borrow money has been important for building strong countries and supporting democracy. Long ago, in the 17th and 18th centuries, England created a parliament that included people who lent money to the government. This helped England borrow more because lenders felt safer knowing that democratic rules would help ensure debts were paid back.

As governments began using debt as a safe way to invest, it helped create private financial markets. Borrowing money to build things like roads and buildings has been linked to stronger economies. Records show that even ancient Greek cities borrowed money from their citizens more than two thousand years ago. The founding of the Bank of England in 1694 changed how governments handled debt, ensuring that debts would always be paid back.

In 1815, after the Napoleonic Wars, British government debt was very high, but it was paid off over many years by earning more money than was spent. By 2020, global government debt had grown to about 99% of the world's total economy, partly because of measures taken during the COVID-19 pandemic.

Impacts of government debt

Government debt can affect the economy in several ways. When a government borrows a lot, it might have to pay higher interest rates. This can make it harder for businesses to get the money they need to grow. Some studies show that when a country's debt is more than about 80% of its total economy, it can slow down growth.

If a country owes too much money, it might struggle to pay it back. This is called a debt crisis. During a crisis, a country might not be able to borrow more money, which can cause big problems. For example, this happened in Latin America in the early 1980s and in Argentina in 2001. To avoid these crises, governments try to keep some space to borrow more if they need to.

Some people think that government debt is like when a family borrows money, but economists say this isn’t quite right. Governments have different tools, like the ability to print money or collect taxes, which can help them manage debt in ways that families cannot. However, too much debt can still cause problems, like higher prices for things we buy.

Risk

Credit (Default) risk

Main article: Credit risk

Sometimes, governments cannot pay back the money they owe. This has happened many times in history. For example, Spain struggled with its debts in the 1600s, and after the American Civil War, the Confederate States could not pay back what they owed.

If a country uses its own money to pay debts, it might seem safer. But not all governments can print their own money. Some smaller areas, like cities or states, depend on bigger governments to help if they have money problems.

Inflation risk

Even if a country can pay its debts, printing too much money to pay them can make prices go up a lot. This is called inflation. In the 1920s, Germany had huge inflation after World War I because they printed lots of money to pay debts.

Exchange rate risk

When someone from another country lends money to a government, they worry about whether their money will still be worth the same later. If a government borrows money using another country's currency, it can avoid this problem, but then it has to worry about changes in that currency's value. Many developing countries borrow money using U.S. dollars.