What is Government Debt?

Published by Thomas Herold in Economics, Investments, Retirement

'Government Debt' is explained in detail and with examples in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Government debt refers to the total amount of government issued IOUs which have not been paid back at any given point. Governments issue such debt any time they chose to borrow money from the public or from overseas nations and companies.

As a government borrows this money, it provides government securities that give all of the important information on this investment debt. The face of the certificates states the interest rate which the government will pay on the original principal, the amount which they are borrowing, and the payment schedule for both principal pay back and interest payments. These outstanding securities are equal to the total debt amount which the government has not paid back. It is also the government debt.

Governments actually issue a variety of debt types. Economists classify such debt in different categories. The first would be by the form of governmental agency that issued such debt in the first place. Within the U.S., the principal governmental agencies which issue debt are state, federal, and local jurisdictions. Local debt is also further subdivided into sub-classes including city-, county-, or parish-issued government debt. All of these are considered a type of government bonds.

Yet another way to classify such government debt is according to the dates of maturity. This is why bond investors and U.S. Treasury officials with the Federal Reserve discuss thirty year and ten year bonds. These are the amounts of time between when the government originally issued the bond and the due date of the principal. With federal government debt, there are three easy to understand and remember types of maturities.

Treasury Bills are the first of these. They come with maturities amounting to a single year or under. This could be three month T-bills or year long T-bills. Treasury notes are the second designation. They have maturities that range from a single year to ten years long. Treasury bonds are the over ten year long maturity dates. With local or state level government debt, the terminology used is just bonds. This is true regardless of when they mature.

There are also bonds that carry infinite repayments. Analysts call these perpetuity bonds. With these bonds, the principal never becomes repaid. Interest payments will then be made forever. This would practically be until the government defaults, the country collapses financially, or the government buys back the bonds. Such bonds were at one time issued by the government of Great Britain. They called these consols.

A final means for classifying government debt bonds comes down to the revenue source which underlies the bonds’ repayment. Those government debts that the entity plans to repay by utilizing revenues they garner from taxing their constituents they call general obligation bonds. Revenue bonds are those bonds that they pay back by employing particular user fees, sometimes from the project itself which the bonds will finance. This could be tolls on a new highway or a bridge. Only local and state government debt is classified this way.

The United States government debt has radically and exponentially increased over the past 15 to 20 years. Consider that in 2004 early in the year, the outstanding federal government debt amounted to around $7.1 trillion. In early 2017, that amount topped $20 trillion for the first time ever. Roughly half of this enormous debt amount the government owes to its pension funds – the Social Security Trust and Medicare Trust Funds.

Some economists like to say that the internal debt does not carry any public welfare or economic impacts, but they are incorrect with this assertion. Since the Social Security Fund will start to need its loaned out money paid back in 2020, it will require the government to issue either new debt to non-governmental buyers or to raise taxes dramatically to pay back the pension funds for the social security recipients’ monthly benefits to continue.

This problem will only worsen over time through 2032 or 2033, when the funds will have exhausted all of their money the government owes them back. At this point, the federal government will either have to abandon the Social Security and Medicare programs entirely, dramatically reduce the benefits to where they are sustainable, hugely increase the age when retirees can draw on them, or vastly increase government revenues from somewhere.

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The term 'Government Debt' is included in the Retirement edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.