Explained: Government Debt


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Overview

A debt represents something, whether a payment or otherwise, that is owed by one party to another. Government Debt (also referred to as public debt or national debt), is used to refer to the total accumulated debts, owed by a government, to other parties. While Government Debt tends to refer to the debt of a specific national or provincial government, Public Debt, on the other hand, refers to the combined total of the two.

Alternatively, a Government Deficit refers to the difference between government receipts (revenue) and spending in a single year. Generally speaking, if deficits are consistently positive (surpluses) the debt will decrease, whereas if the deficits are consistently negative, the debt will increase.

Example 1

To illustrate this point consider a government with receipts (revenues) of $10, and spending of $12 for a given year. The difference between revenue and spending for this year is -2 (10 – 12 = -2) leading to a deficits of $2. If the government had a National Debt of $100 at the beginning of the year, it could expect its National Debt to increase to $102 by year’s end (increasing by the amount of the deficit). Multiply this example by billions and one can begin to understand how sustained and prolonged deficits can plunge a country deeper and deeper into debt.

Important Definitions

Government Debt: The total accumulated debts over time of a specific national OR provincial government.
Public Debt: The total accumulated debts over time of ALL levels of government within a country.
Deficit: The amount by which Government expenditures exceed revenues for a given year.

Government Debt VS Unfunded Liabilities

It is important to note that some people prefer a broader definition of government debt to include all future government liabilities, such as pension payments, that the government has contractually agreed to, but not yet paid. While these are certainly a form of debt, we choose to classify them separately as unfunded liabilities. In many ways, these unfunded liabilities present a greater burden to future generations than all government debt combined. You can learn more about unfunded liabilities by clicking here.

Dangers of Government Debt

So now that we have a basic understanding of what government debt is, let’s explore the consequences of government taking on too much debt. The primary concern has its origin in the very nature of the debt itself. When a government takes on debt to finance its expenditures, it receives money from external investors. It does this through the sale of Government Bonds. These bonds provide the government with money up front, but require the government to pay back the investor the principal of the investment plus a pre-determined amount of interest. This works not unlike a loan you may take out from a local bank to pay your school expenses or to finance a new car purchase.

The Interest Rate Trap

As a government’s national debt increases over time, so too do the interest payments needed to “service” the debt. The increased money needed to pay interest on the debt makes it even harder for a government to raise enough revenues to meet their expenditures. This leads to more borrowing, greater amounts of debt and even higher interest payments. This compounding cycle continues until a government manages to balance its budget or defaults on its financial obligations.

To comprehend the size of the problem here in Canada, consider the fact that our federal government alone spends over $26 billion a year on interest payments. $26 Billion. The Canadian government spends more to simply maintain our current levels of debt each year than on our entire military budget.  Previous generations have expanded entitlements without paying for them, and are now leaving future generations with the bill. This is not fair. That is why we created Generation Screwed.

Additional Resources

Below we have compiled two tables for comparative purposes. One shows the history of Canada’s Federal Debt, while the other compares Canada’s Public debt (as a % of GDP) with other countries of the world. Remember, Public Debt is the accumulated debts of all Federal and Provincial Governments in a country.

If you’d like to view more of our resources on Government debt please click here.

 

History of Canada's Federal Debt (not to be confused with Public Debt)

End
of
Fiscal
Year

Net Debt
$Billions
[1]

as % of
GDP

GDP
$Billions
[2]

1962

14.8

33.0%

44.9

1971

20.3

20.6%

98.4

1981

91.9

25.5%

360.5

1991

377.7

55.1%

685.4

1997

562.9

63.8%

882.7

2002

511.9

44.4%

1,152.9

2008

457.6

28.5%

1,603.4

2009

463.7

30.3%

1,529.0

2010

519.1

31.9%

1,624.6

2011

551.4

32.1%

1,718.7

2012

600.00

2013 (projected)

605.0



Public Debt of Countries Exceeding 0.5% of World, 2012 estimate (CIA World Factbook 2013)[7]

Country

Public Debt
(billion USD)

% of GDP

per capita (USD)

% of World Public Debt

Japan

9,872

214.30%

77,577

17.53%

Greece

436

161.30%

40,486

0.77%

Italy

2,334

126.10%

37,956

4.14%

Portugal

297

119.70%

27,531

0.53%

Singapore

370

111.40%

67,843

0.66%

Belgium

396

99.60%

37,948

0.70%

France

2,105

89.90%

31,915

3.74%

United Kingdom

2,064

88.70%

32,553

3.67%

Spain

1,228

85.30%

25,931

2.18%

Egypt

479

85%

5,610

0.85%

Canada

1,206

84.10%

34,902

2.14%

Germany

2,592

81.70%

31,945

4.60%

United States

11,607

73.60%

36,653

20.61%

Netherlands

488

68.70%

29,060

0.87%

World

56,308

64%

7,936

100.00%

Brazil

1,324

54.90%

6,588

2.35%

Poland

434

53.80%

11,298

0.77%

India

995

51.90%

830

1.75%

Pakistan

283

50.40%

1,462

0.50%

Thailand

292

43.30%

4,330

0.52%

Argentina

323

41.60%

7,571

0.57%

Turkey

489

40.40%

6,060

0.87%

Taiwan

323

36%

13,860

0.57%

Mexico

629

35.40%

5,416

1.12%

Korea, South

535

33.70%

10,919

0.95%

China

3,894

31.70%

2,885

6.91%

Indonesia

311

24.80%

1,240

0.55%

Russia

308

12.20%

2,159

0.55%