Public Debt | Definition, Features, Types & Effects

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National Debt / Public Debt | Definition, Features, Types & Effects

One of the topics that is mostly talked about in the world is debt, not only of the type of personnel debt but also the debts of the countries (national). Although it can be a primary instrument within the economy of the same as it is the one that allows to accelerate the rate of growth, it is a situation that can lead to many problem.

When the governments of a country decides to acquire a debt but cannot mmake provision for it’s repayment, it gradually accumulates, giving rise to public debt.

Public Debt | Definition, Features, Types & Effects

Public Debt | Definition, Features, Types & Effects

 

What is Public Debt?

The public debt is the total amounts of debts by the State or a Country to another Country or Organizations which have accumulated with the passage of different governments and which have been requested in order to obtain greater financial resources.

Features of National / Public Debt

The main characteristics of a public debt are the following:

  • It is represented as % of GDP (gross international product).
  • When the country that has a public debt has a deficit, the debt increases and when there is a public surplus, it is reduced.
  • It can be called sovereign debt, national debt or government debt.
  • The budget deficit for each year is added to the public debt.
  • A public debt that is growing slows slowly the growth of the country long term.
  • If used properly, it can become an excellent financial weapon to improve the economy of a country.

Objectives of Public Debt

The main objective of public debt is to obtain the necessary funds that are required by the public sector of a country at the lowest possible cost and within a level that is considered prudent for long-term risk. It is a mechanism by which the financial sector of a place can obtain greater resources to inject the economy of the region.

In addition, the objective of public debt is to be able to finance a series of country programs and some strategic activities for development and for public investment that, according to their strategic importance for the nation, are justified, for example, money can be requested to deal with different financial emergencies or serious natural disasters.

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Types of National Debt or Public Debt

There are several types of national debt based on two important groups which are mentioned:

  • Due to its origin: this type of debt can be classified as internal or external depending on the residence of the debtor.
    • Internal debt : refers to the debts that are in the hands of the inhabitants of a region. It is a debt that has been issued by the State but where the citizen is the creditor .
    • External debt : this type of debt includes all loans that have been contracted by the public sector to financial institutions from the outside in a currency that is different from the national.
  • By contracting : here the debt is classified by the period or time that the debt will be paid and is classified into the following types:
    • Short term: these are loans that can be obtained with a duration of less than one year for their cancellation.
    • Long term : loans that can be contracted with terms greater than one year.
  • By sources of financing : in this case, public debt is classified depending on who the financial creditors are .

The Issuance of Public Debt (National Debt)

The issuance of public debt is a type of financing which is made up of a series of financial titles that are issued and that also promise a future payment, in other words, it is to borrow money through the issuance of titles in the form of debt.

Its objective is to be able to place this debt among several investors in order to achieve profitability for them. This is one of the main sources through which States can have larger amounts of money either to make payments or to invest.

This type of issuance seeks to be able to face several projects related to the social welfare of the nation and investments in order to make improvements in terms of public services, seeking above all the common good.

Causes of Public Debt

The main cause for the public debt to appear is because there is a recurring imbalance in fiscal matters, in other words, when there is an excess in expenses over income.

The inappropriate use of the monetary funds derived from the debt is another cause for the public debt to break down, as it is not possible to generate sufficient resources to be able to face the contractual debt.

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The different governments that are in charge of the country are a fundamental part of the internal debt because they are responsible for creating large fiscal deficits which over time accumulate as they cannot be canceled in the correct way. In addition, the public budgets that are approved in the country imply excessive spending in terms of current income and these must be canceled through indebtedness, increasing the levels of internal debt.

Effects of Public Debt / National Debt

The effects that can be generated from debt are many, all important and can generate serious problems in a nation. Effects of Public Debt include the following:

  • When the level of indebtedness is reasonable and can be managed correctly, public debt can generate positive effects as it increases growth and productivitythrough capital accumulation.
  • Internal debt can cause public spending to be compromised as a result of the need to pay off debt and interest.
  • Several depressive-type effects can occur in terms of domestic investment and foreign investment.
  • If the money is used only for public payments, there will be very little fund left to dedicate to investment and growth.
  • It can produce a negative effect because it affects the economic variables and the money supply, which means that there is not enough money to buy goods and services.
  • Public savings can be affected because the State does not have the ability to save because all the money must be used to pay the debt.
  • It produces a negative effect on interest in the region as they must be increased in order to pay off the debt.

Differences Between Public Debt and Private Debt

It is important to remember that external debt is the one that occurs in a country when they acquire debts with entities from other countries. The private debt of a country is the set of total debts that exist between companies , financial institutions and even families which are independent of each other and which is based on obtaining monetary funds from clients who provide financing generating their own benefits.

Importance of Public Debt

Public debt is important for the countries because it is a means of financing through which governments have the ability to invest in the fields of health and education, mainly, creation of structures in the country, purchase of supplies and payment of salaries. of the public sector. It is a method by which nations can get ahead more easily when rulers have the ability to properly manage money.

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Examples of Public Debt by Country

  • Public debt of Spain : in the country it has been possible to reduce the gross issuance, the interest burden and the debt ratio, which has caused the Treasury to have good access to the market and they have managed to reduce financing costs, which has been expects it to increase economic growth and fiscal consolidation. In 2019 it stood at 1,306 billion euros .
  • Public debt in Mexico : for the year 2019 the public debt in the country reached 31 million euros, which places it in one of the most indebted countries in the world.
  • In Colombia : in this country, public debt continues to rise rapidly. For the month of September 2019 , the debt was equivalent to 3% of the gross domestic product and in November it was already at 62.2%. Basically all the economic sectors of the country increased the debt.
  • In Germany : the country is currently expecting its second largest deficit in history, caused mainly by the Covid-19 pandemic. deficit of 200 million euros is expected, which came to break the fiscal surplus that the country had.
  • Public debt in Italy : in 2020, the debt reached 6 million euros due to the measures that the country took to be able to cope with all the economic impact caused by the pandemic.
  • In France : its increase in debt has been caused due to the deficit of the central administration and various state agencies. It has increased by 600 million euros, which is equivalent to 99.5% of the annual gross domestic product.
  • From the United States : this is one of the most indebted countries in the world, for the year 2019, the debt was 805,203 million euros, which means that the debt in 2019 reached 108.68% of the country’s GDP.
  • Japan’s public debt : The country owes a total of 257% of GDP, which is equivalent to approximately $ 77,000 per capita.
  • In the United Kingdom : its debt has managed to accumulate 5% of GDP, exceeding two trillion pounds for the first time in history in 2020. Like practically all countries, the cause is attributed to the pandemic since the money is they have used to help the nation.

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