Federal debt

Government debt (also known as public interest, national debt and sovereign debt) is the debt owed by a central government. (In federal states, "government debt" may also refer to the debt of a state or provincial, municipal or local government). By contrast, the annual "government deficit" refers to the difference between government receipts and spending in a single year.

A central government with its own currency can pay for its spending by creating money ex novo. In this instance, a government issues securities not to raise funds, but instead to remove excess bank reserves (caused by government spending that is higher than tax receipts) and '...create a shortage of reserves in the market so that the system as a whole must come to the [central] Bank for liquidity.'

Governments create debt by issuing securities, government bonds and bills. Less creditworthy countries sometimes borrow directly from a supranational organization (e.g. the World Bank) or international financial institutions.

In countries which are Monetarily Sovereign (like the US, the UK and most other countries), government debt held in the home currency are merely savings accounts held at the central bank. In this way this "debt" has a very different meaning to the debt acquired by households who are restricted by their income. Monetarily Sovereign Governments issue their own currencies and do not need this income to finance spending. In these self-financing nations, government debt is effectively an account of all the money that has been spent but not yet taxed back. Their ability to issue currency means they can always service the interest repayments on these savings accounts. This is why bonds and gilts are considered the safest form of investment.

Government debt can be categorized as internal debt (owed to lenders within the country) and external debt (owed to foreign lenders). Another common division of government debt is by duration until repayment is due. Short term debt is generally considered to be for one year or less, long term is for more than ten years. Medium term debt falls between these two boundaries. A broader definition of government debt may consider all government liabilities, including future pension payments and payments for goods and services the government has contracted but not yet paid.

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