Government debt

• 1. Introduction

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  Government debt is one of the most consequential forces shaping modern economies, and in 2020 it hit a number that is almost impossible to picture: $87.4 trillion worldwide, equal to 99% of all the goods and services the entire planet produced that year. That share of global GDP was the highest since the 1960s. Two shocks drove it there: the Great Recession after 2007 and then the COVID-19 pandemic, which caused public debt to soar, particularly in advanced economies that put sweeping fiscal measures in place. But debt held by governments is not a modern invention. Greek city-states such as Syracuse were borrowing from their own citizens two thousand years ago. What makes government debt tick? Who lends, who borrows, and who eventually pays? Those are the questions this documentary explores.

• 2. Measuring the Ledger

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  The International Monetary Fund's Government Finance Statistics Manual 2014, known as the GFSM, sets the international standard for how to count what governments owe. Under that framework, general government debt covers central, state, provincial, regional, and local governments, plus social security funds. It excludes the debt of public corporations, like post offices, that sell goods or services on a market basis.

  Debt instruments under this definition include bonds, bills, loans, and government employee pension obligations. Gross debt is the full total of those liabilities. Net debt subtracts financial assets held in the same form. The GFSM prefers market value, the price at which an asset could be exchanged for cash, though it allows nominal and even face value when market prices are unavailable.

  The debt-to-GDP ratio is the standard scoreboard. GDP measures economic output over a year, so expressing debt as a fraction of it allows countries of vastly different sizes to be compared on equal terms. The OECD treats that ratio as a key indicator of whether a government's finances are sustainable.

  Yet large liabilities sit off the official balance sheet entirely. The 2018 annual reports from the trustees of U.S. Social Security and Medicare revealed that Medicare faced a $37 trillion unfunded liability over 75 years, and Social Security faced $13 trillion over the same window. Neither figure appears in the U.S. gross government debt figure, which in 2024 stood at $34 trillion. Contingent liabilities, such as potential bailouts of local governments or disaster relief, remain similarly invisible until a crisis forces them onto the books.

• 3. Why Governments Borrow

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  King Charles II of England demonstrated the destructive potential of royal borrowing in 1672, when he suspended payments on his bills in what became known as the Great Stop of the Exchequer. The episode wiped out creditors and left the Crown unable to fund itself reliably. It was a cautionary tale that shaped what came next.

  Governments borrow for a structural reason that households do not face: revenues and spending needs move in opposite directions during a crisis. When a recession hits, tax receipts fall and unemployment benefits rise simultaneously. Without access to debt, a government would have to raise taxes or slash services at the worst possible moment, making the downturn worse. Economists call this the shock-absorber function, and events like World War II, the COVID-19 recession, and the Great Recession are textbook examples of when it applies.

  Longer-term investments also justify borrowing. Financing urban infrastructure through debt spreads the cost across the generations that will use it, matching the payers to the beneficiaries. That logic has been linked to modern economic growth.

  The darker side is what economists call deficit bias. Individual politicians face an incentive to spend beyond revenues to boost their popularity. If every politician follows that incentive, the debt-to-GDP ratio grows without limit. To guard against this, several countries have written restraints into law: Sweden adopted a "debt anchor," Germany and Switzerland both use a "debt brake," and the European Union's Stability and Growth Pact requires member states to keep gross government debt below 60% of GDP.

• 4. A Three-Hundred-Year Foundation

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  The founding of the Bank of England in 1694 changed public finance permanently. Before that moment, European monarchs routinely defaulted. After it, the British government never again failed to repay its creditors.

  The mechanism was political as much as financial. England built a parliament that included creditors within a broad governing coalition. Because those creditors had formal power to authorize borrowing and taxation, lenders were far more willing to hold British debt than debt issued by a monarch who could repudiate obligations at will. Democratic institutions, in other words, functioned as a credibility guarantee.

  As British public debt came to be seen as safe and liquid, it could serve as collateral for private lending. That created a feedback loop: reliable public debt markets made private financial markets more robust, and deeper private markets lowered the cost of future public borrowing.

  Other European countries and eventually nations around the world adopted similar institutions over the following centuries. By 1815, at the end of the Napoleonic Wars, the British government had run up debt exceeding 200% of GDP, nearly 887 million pounds sterling. It paid that off over 90 years by running primary budget surpluses, meaning revenues consistently exceeded spending before interest payments were factored in.

  By 1900, France carried the largest total government debt of any country at just over one billion pounds sterling, followed by Russia and then the United Kingdom. On a per-capita basis, New Zealand topped the list at roughly 58 pounds 12 shillings per person.

• 5. Who Lends and at What Risk

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  Private investors, commercial banks, multilateral development banks such as the World Bank, and other national governments all extend sovereign credit. The type of lender a country can attract depends heavily on its income level and perceived creditworthiness.

  Low-income, heavily indebted states typically borrow from multilateral institutions and other governments because private investors consider them too risky. Higher-income states issue sovereign bonds traded by private investors in secondary markets. Rating agencies including Moody's and Standard and Poor's publish credit ratings that measure how likely a government is to repay, and those ratings directly affect bond prices in secondary markets.

  Default has a long history. Spain nullified its government debt several times during the 16th and 17th centuries. After the American Civil War, the Confederate States' debt went entirely unrepaid. Revolutionary Russia after 1917 simply refused to honor the foreign debts of Imperial Russia.

  If a government issues debt in its own fiat currency, default risk is low because it can always create money to repay the obligation. But that option is not available to everyone. Sub-national governments, like municipalities and states, cannot print their own currency. Countries in the eurozone surrendered that tool when they adopted the common currency. When New York City neared insolvency in the 1970s, a bailout from New York State and the federal government was necessary. U.S. state and local government debt amounted to $3 trillion in 2016, with an additional $5 trillion in unfunded liabilities sitting alongside it.

  A government that borrows in a foreign currency eliminates exchange-rate risk for its lenders but absorbs that risk itself, and it loses the ability to inflate the debt away. Almost 70% of all debt in a sample of developing countries from 1979 through 2006 was denominated in U.S. dollars.

• 6. The Cost of Carrying Too Much

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  A World Bank Group report that analyzed debt levels in 100 developed and developing countries from 1980 to 2008 found a specific threshold effect. For developed countries, debt-to-GDP ratios above 77% reduced future annual economic growth by 0.017 percentage points for each additional percentage point of debt. For developing countries the threshold was 64%, and the drag was 0.02 percentage points per additional point of debt.

  High debt can crowd out private investment. When governments compete with private firms for a limited pool of savings, interest rates rise and firms borrow less. Whether this actually happens depends on circumstances; the Ricardian equivalence proposition argues that rational households will save more in anticipation of future taxes needed to retire the debt, leaving interest rates unchanged. Most economists treat this proposition as a benchmark rather than a reliable description of actual behavior.

  Debt crises show what happens when the mechanism breaks down entirely. The Latin American debt crisis of the early 1980s and Argentina's crisis in 2001 are the standard reference cases. When a government cannot make payments and cannot borrow more, it may be forced to sell assets and cut services simultaneously. Firms doing the same thing drive down asset prices, which depresses incomes further, which then erodes tax revenue still more. Historical experience suggests that maintaining room to roughly double government debt if necessary is a practical measure of the fiscal breathing space that makes a crisis less likely.

  In Weimar Germany in the 1920s, the path of least resistance after World War I was money creation to cover debt. The result was hyperinflation, demonstrating that for governments issuing their own currency, the real danger from excessive borrowing runs through prices rather than outright default.