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What is Government Debt?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 13 November 2016
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Government debt, also known as public debt, is any money or credit owed by any level of government. This includes both debt to internal creditors as well as to foreign banks or other countries. Understanding government debt is a good way to understand the economy of a nation within a global context; those countries with higher levels of debt are often at risk for serious economical issues if recession or fiscal emergencies occur.

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

There are many reasons that a government might incur debt. Some of the oldest examples of government debt date back to the plentiful wars between England and France in the Middle Ages. War is often a reason for increased governmental debt, but simple expansion and provision for citizens are even more common reasons. Just as a family might take out a home loan on the idea that they will continue to maintain their income and thus, pay off the debt eventually, so too do governments take on debt in order to furnish and expand their services and economy.

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Whether or not taking on government debt is a good idea is a matter of great debate among economists. In classical Keynesian theory, a certain amount of debt is acceptable so 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 advice against incurring government debt.

Many agree that there is considerable danger if public debt becomes overwhelming. In critical situations, governments have defaulted on debt or refused to take over payments after a governmental overthrow. The fallout of the 2008 global financial crisis has brought government debt problems into stark relief, particularly in the country of Greece. Enormous levels of public debt combined with an uncompetitive market, falling gross domestic product (GDP) and an inability to devalue their currency have put this once prosperous nation on the brink of bankruptcy.

The amount of public debt for a country is typically measured by the ratio of debt to GDP. The European Union declared in the formation of the Eurozone that a country could not become a member of the zone unless it maintained a public debt of under 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 least public debt with a ratio of 3.7%.

It is important to remember that regional and local governments are capable of incurring public debt as well. Though generally on a smaller scale, this type of public debt can still have large ripple effects on a nation's economy. If a city or state government cannot pay its debt, the national government may have to bail them out, leading to additional government spending on a national level.

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