Government Debt: Meaning, How It Works, Good, Bad

Government debt, public debt, or national debt represent the amount of money borrowed by the government. According to the International Institute of Finance (IIF), public debt will reach USD70 trillion in 2019, up from USD65.7 trillion in 2018.

How does government debt work?

Debt arises when the government runs a fiscal deficit, which is when spending exceeds tax revenue. To cover the shortfall, the government must owe, primarily by issuing government bonds and bills.

Accordingly, existing debt outstanding represents a net accumulation of national budget deficits in previous years. When running a massive deficit and for many years, national debt accumulates.

The government borrows from the private sector, both external and internal. Domestic debt holders usually are banks, pension funds, insurance companies, and central banks. Meanwhile, foreign holders can be governments, central banks, or investors from other countries.

The government pays debt from tax revenue. Usually, tax revenue positively correlates with economic growth (measured from real GDP growth). The higher the economic growth, the greater the tax potential that the government collects.

Because of this relationship, the soundness of government debt is usually measured by the ratio of debt to GDP. When the ratio is high, it is not good because it can burden the economy in the long run.

Which country has the most debt?

The three countries with the most significant debt are the United States, Japan, and China. United States government debt reaches USD27.98 trillion at or around 133.92% of its GDP. Meanwhile, the government debt of Japan and China each reached USD12.82 trillion (254.13% of GDP) and USD9,86 trillion (66.33% of GDP).

Country	Nominal (USD Bn)*	% Of GDP
United States	27,980.91	133.92
Japan	12,821.12	254.13
China	9,861.70	66.33
France	3,020.15	115.08
Italy	2,936.95	155.81
United Kingdom	2,830.80	104.47
Germany	2,654.01	69.06
India	2,383.79	89.61
Canada	1,931.09	117.46
Spain	1,535.53	119.92
Brazil	1,429.45	98.94
Korea	784.33	47.88
Australia	779.36	57.33
Mexico	655.40	61.03
Belgium	587.72	114.14
Singapore	526.62	154.90
Netherlands	479.32	52.49
Argentina	399.92	102.79
Greece	399.74	211.22
Indonesia	388.05	36.62
Austria	359.69	83.16
Poland	342.48	57.47
Islamic Republic of Iran	330.19	39.53
Egypt	326.34	89.84
Switzerland	318.65	42.38
Portugal	308.71	135.19
Israel	293.05	71.98
Turkey	286.28	39.77
Russia	285.07	19.28
Ireland	249.03	58.52
Thailand	249.01	49.63
South Africa	232.89	69.45
Pakistan	229.18	87.56
Saudi Arabia	227.80	32.54
Malaysia	227.26	67.43
Taiwan Province of China	218.16	32.65
Sweden	202.07	37.35
Finland	187.47	69.55
Philippines	186.80	51.68
Colombia	177.55	65.38
Vietnam	158.85	46.30
Nigeria	150.30	35.00
Norway	150.08	41.40
Denmark	150.00	42.13
Venezuela	143.71	304.13
Iraq	142.73	84.21
United Arab Emirates	141.26	39.36
Bangladesh	125.70	38.91
Hungary	124.70	80.45
Romania	123.87	49.80
Qatar	104.86	72.10
Ukraine	94.40	60.78
Sudan	93.87	272.92
Czech Republic	92.76	37.81
New Zealand	91.38	43.64
Morocco	86.38	75.37
Chile	82.27	32.54
Algeria	82.07	55.61
Sri Lanka	81.70	101.24
Angola	79.71	136.54
Peru	72.06	35.07
Kenya	69.21	67.57
Slovak Republic	62.98	60.27
Ecuador	60.46	61.19
Dominican Republic	56.40	71.46
Puerto Rico	54.28	52.63
Ghana	54.06	78.92
Ethiopia	53.55	55.43
Oman	51.43	81.16
Croatia	49.85	88.74
Kazakhstan	45.09	26.33
Bahrain	45.05	129.72
Slovenia	42.72	79.78
Costa Rica	41.74	67.51
Uruguay	38.50	68.06
Jordan	38.50	87.98
Tunisia	35.19	89.74
Panama	35.09	66.28
Myanmar	31.93	39.30
Serbia	30.91	58.37
Côte d’Ivoire	29.23	47.74
Bolivia	29.04	78.83
Belarus	28.92	48.05
Lebanon	28.59	150.43
Cyprus	28.34	119.14
Lithuania	26.32	47.13
Tanzania	25.21	39.15
Zambia	24.86	128.70
Guatemala	24.46	31.53
El Salvador	21.97	89.18
Uzbekistan	21.84	36.44
Zimbabwe	18.89	86.15
Cameroon	18.29	45.79
Luxembourg	18.17	24.82
Mozambique	18.02	128.45
Senegal	16.95	68.68
Uganda	16.82	44.10
Iceland	16.74	77.08
Bulgaria	16.31	23.57
Yemen	15.86	84.17
Jamaica	15.00	107.42
Turkmenistan	14.71	32.25
Latvia	14.55	43.47
Nepal	14.33	42.16
Paraguay	13.07	36.65
Lao P.D.R.	12.83	68.18
Trinidad and Tobago	12.79	59.27
Kuwait	12.40	11.71
Honduras	12.23	51.34
Gabon	11.87	77.40
Albania	11.50	77.57
Papua New Guinea	11.38	48.88
Mauritius	10.58	96.88
Republic of Congo	10.44	101.05
Mongolia	10.11	76.95
Georgia	9.54	60.02
Azerbaijan	9.11	21.37
Cambodia	8.63	34.24
Mali	8.30	47.43
Burkina Faso	8.09	46.54
Armenia	8.02	63.48
Malta	7.94	53.30
The Bahamas	7.45	75.15
Democratic Republic of the Congo	7.38	15.16
West Bank and Gaza	7.34	47.19
Bosnia and Herzegovina	7.27	36.72
Benin	7.23	46.14
Namibia	7.00	65.31
Barbados	6.93	156.76
Guinea	6.74	43.78
Malawi	6.48	54.71
North Macedonia	6.30	51.25
Rwanda	6.21	60.11
Niger	6.19	44.97
Madagascar	6.06	46.02
Nicaragua	6.05	47.92
Estonia	5.65	18.46
Maldives	5.46	146.05
Kyrgyz Republic	5.27	68.04
Chad	5.19	47.91
Montenegro	5.13	107.15
Equatorial Guinea	4.90	48.86
Mauritania	4.80	59.19
Togo	4.57	60.28
Suriname	4.28	148.24
Moldova	4.14	34.78
Tajikistan	4.10	51.31
Eritrea	3.85	184.90
Hong Kong SAR	3.44	0.99
Fiji	3.18	70.79
Sierra Leone	3.10	73.74
Haiti	3.10	21.35
Bhutan	3.02	120.74
Botswana	2.93	19.46
Aruba	2.87	115.14
Guyana	2.81	51.37
Cabo Verde	2.70	158.12
Belize	2.10	123.29
Burundi	2.04	66.99
Liberia	1.88	61.89
Kosovo	1.87	24.10
Eswatini	1.64	41.19
South Sudan	1.59	35.81
The Gambia	1.55	83.49
Afghanistan	1.49	7.40
St. Lucia	1.49	92.08
Djibouti	1.41	40.88
Antigua and Barbuda	1.39	101.33
Andorra	1.34	46.80
San Marino	1.20	76.94
Guinea-Bissau	1.14	79.30
Seychelles	1.10	96.48
Central African Republic	1.05	44.14
Lesotho	1.01	50.38
Grenada	0.73	71.30
St. Vincent and the Grenadines	0.69	85.00
Dominica	0.59	108.68
St. Kitts and Nevis	0.56	56.87
Vanuatu	0.45	48.67
São Tomé and Príncipe	0.39	81.37
Samoa	0.38	46.50
Brunei Darussalam	0.34	2.86
Comoros	0.27	22.30
Solomon Islands	0.22	13.99
Timor-Leste	0.22	12.28
Tonga	0.22	43.25
Nauru	0.07	59.34
Micronesia	0.07	16.06
Marshall Islands	0.05	19.01
Kiribati	0.03	17.40
Tuvalu	0.00	7.29

Goods 

For investors, government debt securities such as bonds and bills are considered less risky than corporate debt. For this reason, they often use government bonds as a benchmark in valuing corporate bond prices.

Debt becomes a better alternative than printing money when governments run a budget deficit. Printing money will only lead to hyperinflation, which endangers the economy and drops confidence in the domestic currency.

Debt is also useful if the government uses it to increase the productive capacity of the economy. Infrastructure development, education improvement, research capacity building, and public development all have a positive contribution to the economy in the long run.

Deficits and debt are also alternatives to reduce the unemployment rate, for example, during a recession. By increasing spending or lowering taxes (run a fiscal deficit), the government can stimulate aggregate demand. When successful, it contributes to driving economic activity.

Bads

Debt can also have a severe impact. High debt can cause a crowding-out effect, namely the fall of private investment due to high government debt. Substantial debt means high demand for money. As a result, the price of money (interest rates) becomes expensive, leading to a higher interest rate. An increase in interest rates makes investment costs more expensive, decreasing investment in the business sector.

Furthermore, high levels of debt can lead to high tax rates. The government increases tax rates because it needs more money to repay debt. When tax rates are high, it disincentivizes business and entrepreneurial activities.

Also, when investors lose confidence in the government, they may not demand government bonds. As a result, the central bank has to print money to finance the deficit, leading to hyperinflation.