What is Public Debt? | Back to Basics


Wow! What a house! Maybe a little much for me, though. Okay, this is probably more like what I can afford. Unless, I could borrow the money to get something a little bigger. Perfect. But, borrowing means that I could be in debt. And for a lot of people, that can be intimidating. But debt is really just a way of borrowing money, with the promise of paying it back with interest. That sounds okay, right? Unless. I would take out a big loan that I couldn't pay back. People take out loans all the time to buy houses, cars, to pay for school. All sorts of things. And it's not just people. Companies also borrow. And governments do it too. When a government borrows, it's called public debt or sovereign debt. Governments raise this money by issuing bonds, and then selling them to the public with a guarantee that they'll pay them back. Just like people, countries need money to buy or build stuff that their income, mostly tax revenues, won't entirely pay for. Governments should invest their money wisely in things that help their citizens. Think of education or health care.


Governments can also invest in things that will generate revenue or grow the economy, like infrastructure projects. Governments can also use the money to reduce taxes or they can even give it directly to its citizens who need support. So why are economists sometimes concerned by public debt? Well, for all the benefits that these funds can bring, there are also risks. Let's take two countries to demonstrate. Here’s country A, and here’s country B. Now, let's say both of them have borrowed roughly the same amount of money at roughly the same time.


But looking closer, we can see they have very different economies, notably in size measured by gross domestic product, or GDP. Let’s look at their debt levels again, but this time as a percentage of their GDP. And, wow. You see the difference? Same debt, but very different outcomes. Countries are able to manage their debt when they borrow a reasonable amount relative to their ability to pay it. Country A’s economy is big enough to pay the interest on the debt. If Country B cannot pay things back, well, it gets harder to convince investors to lend you more money. And that is scary because it only gets harder from there. If an economic crisis hits, one of these guys will have the funds they need to respond. The other is going to need some help. The trick here is for governments like Country B to invest the money they borrow wisely, which can help keep debt manageable. So where does that leave me and my new house? Well, first, I need to adjust my own budget. I don't need that. That. That. You're gone. Definitely gone. And second, debt isn’t about living beyond my means.


It's about borrowing a reasonable amount relative to my ability to pay it. Even if I do splurge every now and again..



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