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Public debt
 Public debt refers to the total debt accumulated by a government from internal (domestic) and external (foreign) creditors minus debt repayments. Public debt is also referred to as "national debt" or "government debt."
During the period 2009-2010, the world's public debt (expressed as a percentage of total gross domestic product) grew from 56.8 percent to 59.3 percent. This increase is a cause for concern as rising public debt is not only being confronted by developing countries but also by more advanced nations.
Recent public debt statistics show that nine countries are facing public debt that is over 100 percent of their GDP. To pay off its national debt, a government has to set aside a portion of its budget for debt repayments. The higher the public debt, the larger the portion for debt repayments. The implication here is that funds that could have been intended for the delivery of government services or implementation of projects have to be diverted to service the country's debt obligations.
Why do governments go into debt? When the revenues a government collects are not sufficient to cover expenditures, a government usually resorts to borrowing. A government borrows internally (internal debt), or externally (external debt). These borrowings usually become a necessity during a financial crisis or in times of national emergencies like calamities and war. The financial crisis of 2007 to 2009 is said to be a major cause for the increase in public debt in many countries. Many governments implemented enormous stimulus programs funded by public debt to recover from the crisis. Governments also undertook bailouts of companies, takeovers of financial institutions and recapitalizations.
Public debt is raised in various ways. A government can issue bonds, securities or treasury bills. It can also borrow directly from institutions like the World Bank or the International Monetary Fund. Government securities are drawn as a contract between the government and the creditors. Through these securities a government raises the public loan it needs but it also incurs a liability as it is obligated to repay the interest and the principal of the loan within the contract period. Typical holders of public debt are individual investors, banks, pension funds, insurance firms, small and large corporations, foreign investors, governments, and institutions like the IMF and the World Bank.
Aside from being either external or domestic, public debt can also be classified as follows:
- Productive or Unproductive - a public debt is considered productive when it is utilized to increase a country's productivity. Example, the debt is used to finance infrastructure projects like roads, electricity plants, irrigation systems, etc. These projects provide a source of income which the government can use to pay off the debt. Unproductive debt, on the other hand, are those used to fund relief efforts during natural disasters. They may also be used to finance war or the delivery of social services. These projects are not necessarily bad. They, however, do not generate income that will help the government repay the loan. Further, the debt repayments for these types of public debt have to be sourced elsewhere. Usually, the governments resort to higher taxes.
- Short, Medium, and Long-Term Public Debts
Treasury bills are examples of short-term public debts. They usually mature in less than a year usually three months. Medium-term debt covers a period of over one year to up to five years. Long-term debt, on the other hand, matures in a period of ten years or more. Longer-term loans usually have high interest rates.
Why is there a need for debt management at a time when public debt is high? In the book "This Time Is Different: Eight Centuries of Financial Folly," the authors were more specific on the negative impact of high national debt. They argued that when the public debt to GDP percentage goes past 90 percent, the future potential growth of the GDP is decreased by more than one percent. The authors also said high public debt ushers in slow economic growth and high unemployment. The book points to trends that indicate public debt dramatically rises after a financial crisis.
When faced with a high public debt, what are the options that a country can consider? First, a government can curtail its spending. Or, it can raise taxes. Governments usually do both. Curtailing public spending can have an impact on the delivery of public services. More taxes could also be detrimental to the economy. A government has to weigh its options properly. |
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