Template:Short description Template:Lead extra info Template:Public finance {{#invoke:Hatnote|hatnote}} A country's gross government debt (also called public debt or sovereign debt<ref>"FT Lexicon"Template:Spaced ndash The Financial Times</ref>) is the financial liabilities of the government sector.<ref name="gfsm" />Template:Rp Changes in government debt over time reflect primarily borrowing due to past government deficits.<ref name="oecdd">{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> A deficit occurs when a government's expenditures exceed revenues.<ref name="oecdf">{{#invoke:citation/CS1|citation |CitationClass=web }}</ref><ref name="gfsm"/>Template:Rp 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.<ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref>
In 2020, the value of government debt worldwide was $87.4 US trillion, or 99% measured as a share of gross domestic product (GDP).<ref name="Gaspar">{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> Government debt accounted for almost 40% of all debt (which includes corporate and household debt), the highest share since the 1960s.<ref name="Gaspar"/> The rise in government debt since 2007 is largely attributable to stimulus measures during the Great Recession, and the COVID-19 recession.<ref name="Gaspar"/>
Governments may take on debt when the government's spending desires do not match government revenue flows. Taking debt can allow governments to conduct fiscal policy more effectively, avoid tax increases, and making investments with long-term returns.<ref name=":6">{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> The ability of government to issue debt has been central to state formation and to state building.<ref name="Eichengreen-2021" /><ref name="Stasavage-2003" /> Public debt has been linked to the rise of democracy, private financial markets, and modern economic growth.<ref name="Eichengreen-2021" /><ref name="Stasavage-2003" />
Actors that issue sovereign credit include private investors, commercial banks, multilateral development banks (such as the World Bank) and other governments.<ref name=":6" /> Low-income, highly indebted states tend to attain loans from multilateral development banks and other governments because they are considered too risky for private investors.<ref name=":6" /> Higher-income states tend to issue sovereign bonds, which are subsequently traded by investors in secondary markets.<ref name=":6" /> Ratings agencies (e.g. Moody's, Standard & Poor's) issue ratings that measure the credit-worthiness of governments, which may in turn affect the value of sovereign bonds in secondary markets.<ref name=":6" />
MeasurementEdit
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.<ref name="gfsm" />Template:Rp 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.<ref name="gfsm">{{#invoke:citation/CS1|citation |CitationClass=web }}</ref>Template:Rp
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.<ref name="gfsm" />Template:Rp 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.<ref name="gfsm" />Template:Rp
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.<ref name="gfsm" />Template:Rp Net debt estimates are not always available since some government assets may be difficult to value, such as loans made at concessional rates.<ref name="gfsm"/>Template:Rp
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.<ref name="gfsm"/>Template:Rp However, the nominal value is useful for a debt-issuing government, as it is the amount that the debtor owes to the creditor.<ref name="gfsm"/>Template:Rp If market and nominal values are not available, face value (the undiscounted amount of principal to be repaid at maturity)<ref name="gfsm"/>Template:Rp is used.<ref name="gfsm"/>Template:Rp
A country's general government debt-to-GDP ratio is an indicator of its debt burden since GDP 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 views the general government debt-to-GDP ratio as a key indicator of the sustainability of government finance.<ref name="oecdd"/>
Causes of government debt accumulationEdit
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 say unemployment benefits.<ref name ="sndo">{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> 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;
- a public health emergency like the COVID-19 recession; or
- a severe economic downturn as with the Great Recession.<ref name="eichengreen">{{#invoke:citation/CS1|citation
|CitationClass=web }}</ref>
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.<ref name="ad">Template:Cite journal</ref><ref name="at">Template:Cite journal</ref> To counter deficit bias, many countries have adopted balanced budget rules or restrictions on government debt. Examples include the "debt anchor"<ref name="sndo"/> in Sweden; a "debt brake" in Germany and Switzerland; and the European Union's Stability and Growth Pact agreement to maintain a general government gross debt of no more than 60% of GDP.<ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref><ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref>
Historic benchmarksEdit
The ability of government to issue debt has been central to state formation and to state building.<ref name="Eichengreen-2021">Template:Cite book</ref><ref name="Stasavage-2003">Template:Cite book</ref> Public debt has been linked to the rise of democracy, private financial markets, and modern economic growth.<ref name="Eichengreen-2021" /><ref name="Stasavage-2003" /> 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.<ref name="Eichengreen-2021" /><ref name="Stasavage-2003" />
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.<ref name="Eichengreen-2021"/> Government borrowing to finance public goods, such as urban infrastructure, has been associated with modern economic growth.<ref name="Eichengreen-2021"/>Template:Rp
Written records point to public borrowing as long as two thousand years ago when Greek city-states such as Syracuse borrowed from their citizens.<ref name="Eichengreen-2021"/>Template:Rp But the founding of the Bank of England in 1694 revolutionised public finance and put an end to defaults such as the Great Stop of the Exchequer of 1672, when Charles II had suspended payments on his bills. From then on, the British Government would never fail to repay its creditors.<ref>Template:Cite book</ref> In the following centuries, other countries in Europe and later around the world adopted similar financial institutions to manage their government debt.
In 1815, at the end of the Napoleonic Wars, British government debt reached a peak of more than 200% of GDP,<ref name="public spending">UK public spending Retrieved September 2011</ref> nearly 887 million pounds sterling.<ref name=EB1911>Template:Cite EB1911</ref> The debt was paid off over 90 years by running primary budget surpluses (that is, revenues were greater than spending after payment of interest).<ref name="eichengreen"/>
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);<ref name=EB1911/> on a per-capita basis, the highest-debt countries were New Zealand (£58 12s. per person), the Australian colonies (£52 13s.) and Portugal (£35).<ref name=EB1911/>
In 2018, global government debt reached the equivalent of $66 trillion, or about 80% of global GDP,<ref>Template:Cite news</ref> and by 2020, global government debt reached $87US trillion, or 99% of global GDP.<ref name="Gaspar"/> The COVID-19 pandemic caused public debt to soar in 2020, particularly in advanced economies that put in place sweeping fiscal measures.<ref name="Gaspar"/>
Impacts of government debtEdit
Government debt accumulation may lead to a rising interest rate,<ref name="sndo"/> 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.<ref name="sndo"/><ref name="rugy">Template:Cite journal</ref> 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 countries) reduced future annual economic growth by 0.017 (0.02 for developing countries) percentage points for each percentage point of debt above the threshold.<ref name=WB_2013 >Template:Cite journal</ref><ref name=WP_1 >Template:Cite news</ref>
Excessive debt levels may make governments more vulnerable to a debt crisis, where a country is unable to make payments on its debt, and it cannot borrow more.<ref name="sndo"/> Crises can be costly, particularly if a debt crisis is combined with a financial/banking crisis which leads to economy-wide deleveraging. 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.<ref>Template:Cite journal</ref> Examples of debt crises include the Latin American debt crisis 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.<ref name="sndo"/>
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 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.<ref>Template:Cite journal</ref> 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.
In public discourse, politicians and commentators frequently draw parallels between government debt and household debt, as they argue that a government taking on debt is akin to a household taking on debt. However, economists generally challenge this analogy, as the functions and constraints of governments and households are vastly dissimilar.<ref name=":0">Template:Cite journal</ref><ref>Template:Cite news</ref><ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref><ref name=":1">Template:Cite news</ref> Differences include that central banks can print money,<ref name=":2">Template:Cite news</ref><ref name=":3">{{#invoke:citation/CS1|citation |CitationClass=web }}</ref><ref name=":4">{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> interest rates on government borrowing may be cheaper than individual borrowing,<ref name=":2" /><ref name=":3" /> governments can increase their budgets through taxation,<ref name=":2" /><ref name=":3" /> governments have indefinite planning horizons,<ref name=":5">{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> national debt may be held primarily domestically (the equivalent of household members owing each other),<ref name=":5" /> governments typically have greater collateral for borrowing,<ref>Template:Cite journal</ref> and contractions in government spending can cause or prolong economic crises and increase the debt of the government.<ref name=":1" /> For governments, the main risks of overspending may revolve around inflation rather than the size of the debt per se.<ref name=":4" /><ref name=":5" />
RiskEdit
Credit (Default) riskEdit
{{#invoke:Labelled list hatnote|labelledList|Main article|Main articles|Main page|Main pages}} 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, whose debt was not repaid after the American Civil War; and revolutionary Russia after 1917, which refused to accept responsibility for Imperial Russia's foreign debt.<ref>Template:Cite encyclopedia</ref>
If government debt is issued in a country's own fiat money, it is sometimes considered risk free because the debt and interest can be repaid by money creation.<ref>Template:Cite book</ref><ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> However, not all governments issue their own currency. Examples include sub-national governments, like municipal, provincial, and state governments; and countries in the eurozone. In the Greek government-debt crisis, one proposed solution was for Greece to leave the eurozone and go back to issuing the drachma<ref>M. Nicolas J. Firzli, "Greece and the Roots the EU Debt Crisis" The Vienna Review, March 2010</ref><ref>{{#invoke:citation/CS1|citation |CitationClass=web }}Template:Cbignore</ref> (although this would have addressed only future debt issuance, leaving substantial existing debt denominated in what would then be a foreign currency).<ref>"Why leaving the euro would still be bad for both Greece and the currency area"Template:Spaced ndashThe Economist, 2015-01-17</ref>
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 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.<ref>Template:Cite news</ref>
Inflation riskEdit
A country that issues its own currency may be at low risk of default in local currency, but if a central bank without inflation targeting provides finance by buying government bonds (debt monetization or indirectly quantitative easing), this can lead to price inflation. 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.
Exchange rate riskEdit
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.<ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref> Almost 70% of all debt in a sample of developing countries from 1979 through 2006 was denominated in U.S. dollars.<ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref>
No included or implicit debtEdit
Template:Further Most governments have contingent liabilities, which are obligations that do not arise unless a particular event occurs in the future.<ref name="gfsm"/>Template:Rp 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.<ref name="gfsm"/>Template:Rp Examples of implicit contingent liabilities include ensuring the payment of future pension obligations, covering the obligations of subnational governments in the event of a default, and spending for natural disaster relief.<ref name="gfsm"/>Template:Rp
Explicit contingent liabilities and net implicit social security obligations should be included as memorandum items to a government's balance sheet,<ref name="gfsm"/>Template:Rp but they are not included in government debt because they are not contractual obligations.<ref name="gfsm"/>Template:Rp 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).<ref name="gfsm"/>Template:Rp 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.<ref>Template:Cite news</ref> Neither of these amounts are included in the U.S. gross general government debt, which in 2024 was $34 trillion.<ref>Template:Cite news</ref>
In 2010 the European Commission 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) level.<ref>{{#invoke:citation/CS1|citation |CitationClass=web }}</ref>
See alsoEdit
- Bond (finance)
- Credit default swap
- Crowding-in effect
- Crowding out
- Debt clock
- Debt crisis
- Fiscal multiplier
- Global debt
- Government bond
- Government budget balance
- Municipal bond
- Government budget deficit
- Government spending
- Generational accounting
- Financial repression
- Fiscal policy
- Public finance
- Sovereign default
- Sovereign credit
- Tax
- Warrant of payment
By country: Template:Div col
- 1980s austerity policy in Romania
- Latin American debt crisis
- European debt crisis
- National debt of the United States
Lists: Template:Div col
- List of countries by credit rating
- List of countries by external debt
- List of countries by net international investment position
- List of countries by government debt
- List of sovereign debt crises
Further readingEdit
- Alexandra Zeitz. 2024. The Financial Statecraft of Borrowers. Oxford University Press.
ReferencesEdit
External linksEdit
Template:Sister project Template:Sister project Template:NIE Poster
- The IMF Public Financial Management Blog
- OECD government debt statistics
- Japan's Central Government Debt
- 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 Template:Webarchive
- Slaying the Dragon of Debt, Regional Oral History Office, The Bancroft Library, University of California, Berkeley
- A historical collection of documents on or referring to government spending and fiscal policy, available on FRASER
- Template:Cite encyclopedia Template:OCLC
- {{#invoke:citation/CS1|citation
|CitationClass=web }}
- Databases