We hear about government debt a lot, we know that most governments around the world are struggling, constantly trying to find money, save money and pay off their debts. What exactly does government debt mean, and what does it mean for us?
I am about to explain.
Government debt is also known as national or public debt. It is debt that is owned by central government. The annual government deficit refers to the difference between the money that the government receives, e.g. what they make from taxes, for example, to how much that they spend each year.
Operations in countries are financed by government debt, although this is not the only method. Governments can also create money to monetize their debts, therefore getting themselves out of having to pay the interest. This, however, does not get them out of any of the debt!
Governments will usually borrow their money from bonds or securities, or most commonly, the World Band or other financial institutions.
Where does the government make it’s income then?
The government’s income comes from various places. Much of the population obviously contribute towards the income, through paying their taxes. Government debt can be categorised as internal debt and external debt. Sovereign debt usually means a government debt that has been issued in another currency.
There is also such thing as long and short term debt. Short term debt is generally considered to be for one year or less, long term is for more than ten years. A medium-term debt falls in between these two boundaries.
Sovereigns and bonds
A government bond is a bond that is issued by a national government. These bonds are given in the currency of the governments that are giving them away. In most developed countries, governments are prohibited by law from printing money directly by their central banks.
Sovereign bonds are bonds that are issued by national governments in foreign currencies. Investors in these bonds denominated in foreign currency have to face the additional risk that the issuer may be unable to obtain foreign currency to redeem the bonds. In the 2010 Greek debt crisis, for example, the debt remained in Euros, and the proposed solution was to change it to its original drachma.
Government implicit debt is the promise by a government of future payments from the state. This will usually be of long term payments such as pensions and health expenditure; not education or defence though.
Ok, all the technical stuff has been explained, so what does the debt mean for us?
The national debt obviously has an impact on the residents of every country. The cost of living is bound to rise along with the debt. Housing becomes more expensive and so do our food bills increase.
This therefore means that more people begin to struggle with the debt that they are in, taking out credit to pay off credit, and it becomes a mean and vicious cycle. Governments put up their council tax and begin charging more for prescriptions, increasing the cost of living even more. It is a grim reality but something we have to deal with in this day and age.