Government debt is the money owed by any branch of government, including federal, state, and local. It builds up when the government spends more than it collects in taxes. Public debt includes external debt owed to foreign lenders and domestic debt owed by citizens. Governments with strong economies can issue government bonds, while less robust governments may turn to international institutions or banks. Government debt can also include promised services and payments. It is divided by internal and external gap and the term of the loan granted. If a state or municipality defaults on its debt, the cost is absorbed by the country.
National debt, also sometimes referred to as government debt, is all the money owed at any given time by any branch of government. It includes debt owed by the federal government, state government, and even municipal and local government. It is, in effect, an extension of personal debt, as individuals make up the government’s revenue stream. Government debt builds up over time when the government spends more money than it collects in taxes. As a government engages in more deficit spending, the amount of debt increases.
Many different types of debt make up public debt. Much of it is external debt, i.e. money owed by the government to foreign lenders, in the form of international organizations, other governments or groups such as sovereign wealth funds, which invest in government bonds. Public debt is also made up of domestic debt, where citizens and groups within the country lend money to the government to keep it operating. In a way, this is very similar to lending to yourself, as ultimately the responsibility falls on the same people who lend money.
Governments with strong economies, which are trusted by the world, are able to raise funds by issuing their own bonds, usually called government bonds. Individuals, other nations and groups buy these bonds and the government promises to pay them back at a certain, usually quite good, interest rate. Less robust governments, which do not have the world’s confidence to issue bonds and expect the people to buy them, may turn to international institutions, or even ordinary banks, to lend them, usually at less favorable rates.
Some people use the term government debt to refer not only to money owed directly in the form of securities that can be collected by a government, but also to the pool of money owed in the form of promised services and payments. For example, some calculations may also include pension payments that the government may owe its employees or contracts that the government has made but has not yet paid.
This type of debt is usually divided not only by an internal and external gap, but also by the term of the loan granted. Short-term government debt is expected to last only one or two years, so the turnover rate is quite high. Long-term debt is designed to last more than ten years, some of which last much longer. Medium-term debt lasts three to ten years.
As with all debt, government debt sometimes defaults and this can get very complicated. Supranational organizations, especially the International Monetary Fund, have great power bestowed upon them by the international community to ensure that nations do not fail and to take over a variety of financial matters if it appears they will. At levels below the national level, this debt is usually guaranteed by the nation of which the local or regional government is a part. So if a state or municipality were to default on its debt, that cost would then be absorbed by the country itself. In the 1960s, for example, New York City effectively went bankrupt, and both New York State and the US federal government were required to bail it out.
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