Government Debt

Government debt is the running total — the stock — as opposed to the budget deficit, which is the annual flow. Each year a government spends more than it earns, it adds to the debt pile by issuing new bonds or other borrowing instruments. When it runs a surplus, it can retire some debt. The debt is held by a wide variety of creditors: domestic pension funds, insurance companies, commercial banks, foreign central banks, and individual investors. The mix of domestic versus foreign holders matters — heavy foreign ownership can make a country more vulnerable to sudden shifts in international investor sentiment.

Not all government debt is the same instrument. Short-term bills mature in weeks or months; medium-term notes mature in a few years; long-term bonds can run for 10, 20, or 30 years. Governments must constantly refinance maturing debt by issuing new debt — a process called "rollover." When interest rates rise, new debt is issued at higher rates, gradually increasing the interest burden on the budget even if the total debt stock stays flat. This is why traders on bond markets watch the composition and maturity profile of government debt, not just the headline total.

A common misconception is that government debt works exactly like household debt. Governments with their own currency and a central bank have tools households do not — they can issue currency and typically have indefinite lifespans. That said, debt levels are not irrelevant; very high debt-to-revenue ratios can constrain fiscal flexibility and affect a country's credit rating, which in turn affects the interest rate the government must pay on new borrowing. See how debt levels compare globally on the countries page.