Government Debt

Governments borrow by issuing bonds and other securities, which are bought by domestic and foreign investors, banks, pension funds, insurance companies and central banks. Government debt is also called public debt, national debt or sovereign debt.

Debt builds up over time. Each year's budget deficit adds to the total, while a surplus can reduce it. For example, a government that runs a deficit of 50 billion every year for ten years will add around 500 billion to its debt, plus the interest owed.

Government debt allows governments to fund spending without immediately raising taxes, smooth out the effects of recessions and invest in long-term projects. Governments that borrow in their own currency and have strong institutions can often sustain high levels of debt.

High debt has potential drawbacks. Interest payments take up a growing share of the budget, leaving less for other spending. If investors lose confidence, borrowing costs can rise sharply, leading to a debt crisis. Debt levels are usually assessed relative to the size of the economy, using the debt-to-GDP ratio.