public debt

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When government borrowing reaches the edge.

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Public debt is money owed by governments, typically in the form of bonds and other securities that promise repayment at a future date. Private debt, by contrast, is money owed by individuals, businesses, and nongovernmental organizations.

The debt owed by national governments is usually referred to as the national debt, as opposed to the public debt of state and local government bodies. The term sovereign debt is also commonly used for debt issued by national governments. In the United States, bonds issued by states and local governments are known as municipal bonds, whereas federal debt is issued primarily through Treasury securities. In the United Kingdom, government bonds are known as gilts, while short-term government debt is also issued through Treasury bills.

Public debt is an obligation of the government, not of individual taxpayers. Although tax revenue may be used to pay interest and principal on the debt, creditors cannot seize taxpayers’ property if the government fails to pay. Government property also generally cannot be seized to satisfy the debt. In the case of sovereign debt, creditors’ legal options for enforcing payment are typically limited by the laws and agreements governing the debt.

Forms of public debt can be classified in several different ways:

Much debate has centered on questions about how large the national debt may safely be allowed to grow, how and when public debt should be repaid, what effects public borrowing has on the economy, and even whether governments should borrow at all or should finance all expenditures out of current revenues.

Governments may borrow when large or unexpected expenditures would otherwise require substantial immediate tax increases. National governments, for example, have historically borrowed heavily to finance wars and other emergencies. State and local governments may borrow for large capital projects such as highways, schools, and public utilities.

Governments may also borrow as part of fiscal policy. During a recession, a government may increase spending or reduce taxes to stimulate economic activity, even if doing so increases the budget deficit and requires additional borrowing. This approach is closely associated with John Maynard Keynes, who argued that government spending could help offset weak private-sector demand during economic downturns. Deficit spending can also contribute to inflation, particularly when additional demand exceeds the economy’s capacity to produce goods and services.