Government debt

In public finance, government debt, also known as public interest, public debt, national debt and sovereign debt,[1][2] is the total amount of debt owed at a point in time by a government or sovereign state to lenders. Government debt can be owed to lenders within the country (also described as internal debt) or owed to foreign lenders (external debt). Government debt contrasts to the annual government budget deficit, which is a flow variable that equals the difference between government receipts and spending in a single year. Government debt represents the accumulation of all prior deficits. The government is typically obligated[by whom?] to pay interest on its debt.

A common method of analysing government debt is by duration until repayment is due. Short-term debt is generally considered to be for one year or less, and long-term debt is for more than ten years. Medium-term debt falls between these two boundaries. Short-term debt is not to be confused with debt falling due, short-term debt is often urgent funding and is risky and hence more expensive. A broader definition of government debt may consider all government liabilities, including all current pension accounts as well as all legally binding contracts for goods and services - both internally and internationally - due by a given date.

Governments can create debt by issuing government bonds and bills. Some countries may be able to borrow directly from a supranational organization (such as the World Bank) or from international financial institutions. The ability of government to issue debt has been[when?] central to state formation and to state building.[3][4] Public debt has been linked[by whom?] to the rise of democracy, private financial markets, and modern economic growth.[3][4]

A central government with its own currency can pay for its nominal spending by creating money ex novo,[5] although typical arrangements leave money-creation to central banks. In this instance, a government issues securities to the public - not to raise funds, but instead to remove excess bank reserves (caused by government spending - including debt-servicing cost that is higher than tax receipts) and to '...create a shortage of reserves in the market so that the system as a whole must come to the [central] Bank for liquidity.'[6]