Public debt includes local, state, and national government debt, with external debt owed to other countries and organizations. Domestic debt is owed to individuals and businesses within the country. Short and long-term debt affects a country’s debt sustainability, with deficit spending used to stimulate the economy. High levels of debt can lead to economic consequences.
Public debt is made up of local, state and national government debt. 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 public debt is often considered an economic warning sign, but it largely depends on the type of debt and current economic trends in the country.
The public debt created by the national government is better known as external debt. This includes money, services or goods owed to other governments, international organizations such as the World Bank or financial institutions in other countries. Most countries in the world have a substantial amount of external debt, which can create global economic problems if a country defaults 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 avoid damage to the entire economic spectrum.
Domestic debt is another important component that makes up the public debt. Refers to any money or services owed to individuals, businesses or financial institutions in the country. Domestic debt is most often created by state or local governments, as 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 return on maturity, in order to increase government revenues in the short term. Other forms of domestic debt can include government contracts, such as construction or defense, and the payment of pension programs, such as veterans’ benefits or Social Security.
Both internal and external debt can be created in the short or long term. Short-term government debt must be paid off over a period of months or a few years, while long-term debt can take decades before it is paid off. The split between short-term and long-term debt is important when measuring a country’s debt sustainability: a nation may be quite capable of paying its currently overdue loans, but appears to be in serious financial trouble if all its long-term debt is also considered .
Public debt is usually created through deficit spending. This practice allows governments to spend more than they spend over a period of time, usually to stimulate the economy. While some deficit spending may be necessary and manageable, many economists caution against raising the level of public debt too often. Should a major disaster occur, countries with extremely high levels of debt could be at risk of falling into default, which could have severe economic consequences for years to come.
Asset Smart.
Protect your devices with Threat Protection by NordVPN
