Public debt usually only refers to national debt, but some countries also include the debt owed by states, provinces and municipalities. Therefore, be careful when comparing public debt between countries to make sure the definitions are the same.
Regardless of what it's called, public debt is the accumulation of annual budget deficits. It's the result of years of government leaders spending more than they take in via tax revenues. For more, see How the Debt and Deficit Differ and Affect Each Other.
U.S. Public Debt:
- Public debt includes Treasury bills, notes and bonds, which are typically bought by large investors. You can become an owner of the public debt by purchasing savings bonds and TIPS.
- Intragovernmental debt is the amount Treasury owes to some federal retirement trust funds, most importantly the Social Security Trust Fund.
On October 17, 2013, the U.S. debt surpassed $17 trillion, and its debt-to-GDP ratio was more than 100%. However, the public debt was a more moderate $12.1 trillion, making the public debt-to-GDP ratio a safe 73%. Perhaps that's why investors did not insist on higher interest rates. In fact, interest rates were historically low. To understand why, see U.S. Debt Crisis.
Public Debt vs External Debt:
When Public Debt Is Good:
When used correctly, public debt improves the standard of living in a country. That's because it allows the government to build new roads and bridges, improve education and job training, and provide pensions. This spurs citizens to spend more now, instead of saving for retirement, further boosting economic growth.
When Public Debt Is Bad:
However, governments have a tendency to take on too much debt because the benefits make them popular with voters. Therefore, investors usually measure the level of risk by comparing debt to a country's total economic output, known as Gross Domestic Product (GDP). The debt-to-GDP ratio gives an indication of how likely the country can pay off its debt. Investors usually don't become concerned until the debt-to-GDP ratio reaches a critical level. That's usually 90% for developed countries, and 70% for emerging market countries.
When it appears the debt is approaching a critical level, investors usually start demanding a higher interest rate. They want more return for the higher risk. If the country keeps spending, then its bonds may receive a lower S&P rating. This indicates how likely it is the country will default on its debt. As interest rates rise, it becomes more expensive for a country to refinance its existing debt. In time, more income has to go toward debt repayment, and less toward government services. For more on how this has actually occurred in Europe, see Sovereign Debt Crisis.