Government debt (also known as public debt, national debt, and sovereign debt) is the debt owed by a central government. (In the U.S. and other federal states, “government debt” may also refer to the debt of a state or provincial government, municipal or local government.) By contrast, the annual “government deficit” refers to the difference between government receipts and spending in a single year, that is, the increase of debt over a particular year. Government debt is one method of financing government operations, but it is not the only method. Governments can also create money to monetize their debts, removing the need to pay interest. But this practice reduces government interest costs rather than truly canceling government debt and can result in hyperinflation if used unsparingly. Governments usually borrow 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. As the government draws its income from much of the population, government debt is an indirect debt of the taxpayers. Government debt can be considered internal debt (owed to lenders within the country) and external debt (owed to foreign lenders). Another standard division of government debt is by duration until repayment is due. Short-term debt is generally considered for one year or less, and long-term debt 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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