Public debt, which is also sometimes referred to as government debt, is all of the money owed at any given time by any branch of the government. It encompasses debt owed by the federal government, the state government, and even the municipal and local government. It is, in effect, an extension of personal debt, since individuals make up the revenue stream of the government. Public debt accrues over time when the government spends more money than it collects in taxation. As a government engages in more deficit spending, the amount of debt increases.
Many different types of debt make up public debt. A great deal of it is external debt, which is money that is owed by the government to foreign lenders, either in the form of international organizations, other governments, or groups like sovereign wealth funds, which invest in government bonds. Government debt is also made up of internal debt, where citizens and groups within the country lend the government money to continue operating. In some ways, this is a lot like lending to oneself, since ultimately the responsibility for it falls back on the very people lending money.
Governments with strong economies, who are well trusted in the world, are able to raise funds by issuing their own securities, usually called government bonds. Individuals, other nations, and groups buy these bonds, and the government promises to pay them back at a certain, usually fairly good, interest rate. Less robust governments, who do not have the trust from the world to be able to issue bonds and expect people to buy them, may turn to international institutions, or even normal banks, to give them loans, usually at less favorable rates.
Some people use the term public debt to refer not only to money directly owed in the form of securities that can be collected on by a government, but also on the pool of money owed in the form of services and payments promised. For example, pension payments the government may owe to its employees, or contracts the government has entered into but has not yet paid, may also be included in some calculations.
This type of debt is usually broken down not only by an internal and external divide, but also by the length of the loan made. Short-term public debt is foreseen to last only one or two years, so the turnover rate is fairly high. Long-term debt is designed to last more than ten years, with some lasting considerably longer than that. Mid-term debt lasts anywhere between three and ten years.
As with all debt, public debt is sometimes defaulted on, and this can get very complicated. Supranational organizations, most notably the International Monetary Fund, have a great deal of power granted them by the international community to ensure nations don’t default, and to take control over a number of financial issues if it looks like they will. On levels lower than the national level, this debt is usually guaranteed by the nation the local or regional government a part of. So if a state or municipality were to default on its debt, that cost would then be absorbed by the country itself. In the 1960s, for example, the city of New York went effectively bankrupt, and both New York State and the federal government of the United States were required to help bail it out.
