National Debt
National debt (also called government debt, public debt, or sovereign debt) is the total amount of money owed by a government to its creditors. It accumulates when a government runs fiscal deficits and borrows to finance them, and it declines when the government runs surpluses and repays debt.[1]
Definition
National debt consists of the outstanding financial obligations of a government, typically in the form of government bonds and other securities held by domestic and foreign investors, banks, and institutions. It is often expressed as a ratio of debt to gross domestic product (GDP), which provides a measure of a country's ability to service its debt.[1]
Types
| Type | Description |
|---|---|
| Gross debt | Total debt without deducting government financial assets. |
| Net debt | Gross debt minus government financial assets. |
| External debt | Debt owed to foreign creditors. |
| Domestic debt | Debt owed to creditors within the country. |
Financing and costs
Governments issue bonds to finance their debt. The cost of debt depends on interest rates and on the market's assessment of the government's creditworthiness. High levels of debt can:
- Raise the interest rates a government must pay.
- Crowd out private investment.
- Limit the government's ability to respond to future crises.
- Increase the risk of a debt crisis if investors lose confidence.
Sustainability
The sustainability of national debt depends on the balance between the debt level, the interest rate paid, and the economy's growth rate. If an economy grows faster than the interest rate on its debt, the debt-to-GDP ratio can fall over time even without primary surpluses. The appropriate level of debt is a subject of continuing debate among economists and policymakers.[1]