Public debt is made up of debts owed by local, state, and national governments. These debts can take many forms, such as direct loans that must be repaid and promises of services or goods that must be fulfilled. A high public debt level is often considered an economic warning sign, but it depends largely on the type of debt owed and the current economic trends within the country.
Public debt created by national government is most often known as external debt. This includes money, services, or goods owed to other governments, international organizations such as the World Bank, or to financial institutions in other countries. Most countries in the world carry a substantial amount of external debt, which can create global economic problems should a country default on its loans. In cases where default on external debt is imminent, governments and international organizations often work together to create a sustainable solution, in order to prevent damage to the entire economic spectrum.
Internal debt is another major component that makes up public debt. This refers to any money or services owed to individuals, businesses, or financial institutions within the country. Internal debt is more often created by state or municipal governments, since they generally do not have the power to negotiate with other nations. Internal debt may include bonds and securities, which are issued to investors with a guaranteed return at maturity in order to raise government revenues in the short term. Other forms of internal debt may include government contracts, such as those for construction or defense, and the payment of pension programs such as veteran's benefits or Social Security.
Both internal and external debt may be created on a short- or long-term basis. Short-term public debt must be paid off in a period of months or a few years, while long-term debt may have decades before it enters repayment. The division between short and long term debt is important when measuring the debt sustainability of a country: a nation may be well able to pay off its currently due loans, but appear to be in serious financial trouble if all long-term debts are also considered.
Public debt is usually created through deficit spending. This practice allows governments to spend more than they make over a period of time, often in order to stimulate the economy. While some deficit spending may be necessary and manageable, many economists warn against raising the level of public debt too frequently. Should a serious disaster occur, countries with extremely high debt levels may be in danger of falling into default, which can cause severe economic consequences for years to come.
