Glossary
Macroeconomics
Public debt
Public debt is the total amount of money owed by a government to its creditors as a result of past borrowing. Governments typically borrow when their spending exceeds the revenue they collect from taxes and other sources. Public debt is usually built up over many years and is financed largely through the issuance of government bonds and other debt securities. These may be held by domestic investors, overseas investors, financial institutions, central banks and other public-sector bodies.
How is public debt measured?
Public debt is often expressed as a percentage of Gross Domestic Product (GDP). This allows the size of the debt to be compared with the overall size of the economy and makes comparisons across countries and over time more meaningful.
A country with a large nominal amount of debt may still have a relatively manageable debt burden if its economy is also large.
Different measures of public debt can produce different figures. Some measures include only central government borrowing, while others include wider parts of the public sector. Debt can also be reported on a gross basis or a net basis, with net debt subtracting certain financial assets held by the government.
Why does public debt matter?
Public debt is not inherently problematic. Governments routinely borrow to fund public services, infrastructure, investment or temporary support during economic downturns and crises.
The sustainability of debt depends on factors such as:
- the size and growth rate of the economy;
- government revenues and spending;
- the interest rate paid on the debt;
- the maturity profile of government borrowing;
- inflation;
- investor confidence.
Higher debt can increase the amount governments must spend on interest payments, potentially reducing the resources available for other priorities. If investors become concerned about a government's ability or willingness to service its debt, they may demand higher yields to lend to it.
Public debt and the budget deficit
Public debt and the budget deficit are related but different.
The budget deficit measures the shortfall between government revenue and expenditure over a particular period, usually a year. Public debt is the accumulated stock of borrowing outstanding at a particular point in time.
Running a budget deficit will generally add to public debt, while a budget surplus can help reduce it, although other factors can also affect the debt total.