The Basics: What is Personal Debt?
Personal debt is money an individual borrows and promises to pay back with interest. The borrower (debtor) receives money now; the lender (creditor) provides it and charges a fee for the convenience.
Good Debt vs Bad Debt
Not all debt is created equal. A common rule-of-thumb splits personal borrowing into two types.
Shifting Gears: What is Government Debt?
Government debt (also called public or national debt) is the total amount a state owes to its creditors. Governments have income (mainly taxes) and expenses (infrastructure, healthcare, education, defence, public salaries). When expenses exceed income, borrowing fills the gap.
Debt vs Deficit: the Crucial Difference
The deficit is a one-year snapshot: spending minus revenue. The debt is the accumulated total from previous years. A handy analogy: the deficit is what you add to your card this month; the debt is your total outstanding balance.
How Does a Government Borrow?
Mostly by issuing bonds — a formal IOU. Investors buy a bond (say $1,000), receive regular interest, and get the $1,000 back at maturity. Investors can be households, banks, pension funds, other countries, or — in some cases — the central bank.
Who Does the Government Owe?
- Domestic investors: households, banks, insurers, pension funds
- Foreign investors: other countries, global funds
- Central bank: sometimes holds bonds to manage the economy
Is Government Debt Always a Bad Thing?
Unlike a household, a government doesn’t need to reduce debt to zero. Most economists agree that some debt is useful — and sometimes necessary.
The Key Metric: Debt-to-GDP Ratio
To judge scale, economists compare total debt to the size of the economy: the debt-to-GDP ratio. Think of GDP as a country’s yearly “salary.”
Example: earning $50,000 with $25,000 debt is a 50% ratio. Earning $50,000 with $200,000 debt is 400%. The same logic helps compare countries.
What Moves the Debt Ratio Over Time?
Three forces shape the path of debt-to-GDP:
- Primary balance — the budget before interest. Surpluses push debt down; deficits push it up.
- Growth vs interest (r–g) — when g outpaces r, the ratio tends to stabilise or fall.
- One-off measures — bank rescues, asset sales, inflation shocks or FX moves.
Methodological details: how we estimate and update figures.
Frequently Asked Questions (FAQs)
What is the difference between debt and deficit?
A deficit is the one-year shortfall when spending exceeds revenue. Debt is the total outstanding amount built up over time from past deficits and surpluses.
Can a country ever pay off its debt?
Possible, but uncommon. Most large economies roll over their debt by issuing new bonds to repay maturing ones. The aim is sustainability, not zero.
Is all personal debt bad?
No. Debt that builds assets or income potential (mortgage, education, business) can be helpful; high-interest consumption debt is usually harmful.
Sources: Eurostat (government finance statistics) and national finance ministries. Educational overview; not investment advice.