Thursday 24 September 2009

Public debt in UK

Government debt (also known as public debt or national debt) is money (or credit) owed by any level of government; either central government,federal government, municipal government or local government. The annual government deficit, however, refers to the difference between government receipts and spending.

As the government draws its income from much of the population, government debt is an indirect debt of the taxpayers. Government debt can be categorized as internal debt, owed to lenders within the country, and external debt, owed to foreign lenders. Governments usually borrow by issuing securities, government bonds and bills. Less creditworthy countries sometimes borrow directly from supranational institutions. Some consider all government liabilities, including future pension payments and payments for goods and services the government has contracted but not yet paid, as government debt.

Another common division of government debt is by duration until repayment is due. Short term debt is generally considered to be one year or less, long term is more than ten years. Medium term debt falls between these two boundaries.(c)Wiki


So the government borrowing can happen in two ways:by different kind of bonds and by government liabilities.


Why so many people suppose that huge government debt is a great problem for any country?

  • Crowding out problem
If the government borrows a lot of money,credits for ordinary people are becoming more expensive because less money is left for the private sector.
  • Default risks
Big credits can become even bigger credits because of the interest that have to be paid.
  • Hyperinflation

To cover the debt government may just decide to issue more money.If we assume that the real output does not change because of that(due to various reasons), the value of the currency will go down, therefore the prices will rise.

  • Loss of the people confidence
Government debt is seen as one of the possible indicators of economics situation in the country.