Public debt

A country's national debt - also known as its public debt - is a matter of economic and political significance. It has often been the subject of controversy, and some have considered it to have moral significance.

Definition

The OECD's broad definition of public debt as "the external obligations of the government and public sector " is in general use, but national definitions differ in detail and produce figures that may not be comparable. The European Union's definition embodied in its Stability and Growth Pact of "General Government Gross Debt" differs in detail from the complete OECD definition.

Overview

It is customary in normal times for governments to use borrowing to finance investment, and it is current practice for the main industrialised countries to allow national debt to accumulate to between 40 and 60 per cent of GDP (except Japan and Italy, with percentages of over 100). It is also normal practice for governments to allow national debt to rise to between 70 to 100 per cent of GDP during major recessions - as a result, mainly of the operation of their economies' automatic stabilisers, but also from the use of fiscal stimuluses, intended to compensate for reductions in private sector spending.

Such policies are not uncontroversial, however, and even relatively modest levels of national debt, amounting to no more than 50 per cent of GDP, commonly meet with expressions of concern as being "unhealthy" or even dangerous. Such popular concern may be attributable to an instinctive belief that saving is virtuous and borrowing is discreditable, or to the belief that it imposes unfair burdens on future generations, or to the once universal reverence for balanced budgets - but it is also attributable to rational fears of harmful economic consequences. Public choice theorists oppose government expenditure, even for the purposes of investment, on the grounds that the politicians concerned are mainly motivated by personal gain, rather than a desire to serve the public interest. Austrian School economists argue that fiscal stimulus expenditure is ineffective, partly because of the "Ricardian equivalence" argument that it is nullified by increases in private sector saving and partly out of scepticism about the ability of politicians to manage the economy. Other economists have demonstrated that the persistent use of deficit financing is bound to lead eventually to a "debt trap" from which a government cannot escape except by defaulting on its obligations or by expanding the money supply. Folk-memories of the 1931 German hyper-inflation, which was caused by the use of "monetisation" to manage high levels of postwar debt, may have created unease, and the 1998 default of the Russian government may have raised concern by its demonstration of the fact that sovereign governments are not immune from the dangers of insolvency. Sovereign default among developing countries is not, in fact, uncommon, and although the danger that it it could happen to a major industrialised country is generally considered to be remote, a persistent rumour of its possibility might alarm investors to the point of making it self-fulfilling.