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Government debt can take many forms and includes external debt owed to other countries or organizations, and domestic debt owed to individuals, businesses, and financial institutions. Short-term and long-term debt sustainability is important, and deficit spending can lead to high levels of debt that can cause economic consequences.
Government debt consists of debts owed by local, state, and national governments. These debts can take many forms, such as direct loans that must be repaid and promises of services or goods that must be fulfilled. A high level of government debt is often taken as an economic warning sign, but it largely depends on the type of debt owed and current economic trends within the country.
Public debt created by the national government is often known as external debt. This includes money, services or assets owed to other governments, international organizations such as the World Bank, or financial institutions in other countries. Most countries in the world have large amounts of external debt, which can create global economic problems should a country default on its loans. In cases where external debt default is imminent, governments and international organizations often work together to create a sustainable solution, in order to prevent damage across the entire economic spectrum.
Domestic debt is another major component that makes up public debt. This refers to any money or services owed to individuals, businesses or financial institutions within the country. Domestic debt is most often created by state or municipal governments, since they generally lack the power to negotiate with other nations. Domestic debt can include bonds and securities, which are issued to investors with a guaranteed yield at maturity in order to raise short-term government revenue. Other forms of domestic debt can include government contracts, such as construction or defense contracts, and the payment of retirement programs such as Veteran’s benefits or Social Security.
Both internal and external debt can be created in the short or long term. Short-term government debt must be repaid over a period of months to a few years, while long-term debt can be decades before repayment occurs. The split between short-term and long-term debt is important when measuring a country’s debt sustainability: a nation may be able to repay its currently owed loans, but appears to be in dire financial straits when all debts are also considered. long-term .
Government debt is usually created through deficit spending. This practice allows governments to spend more than they do in a period of time, often in order to stimulate the economy. While a little deficit may be necessary and manageable, many economists warn against raising the level of government debt too frequently. In the event of a major disaster, countries with extremely high debt levels could be at risk of default, which can cause severe economic consequences for years to come.
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