Public debt is the obligation on the part of the government, one of its agencies, or of local government, to pay specific monetary sums to holders of legally designated claims at particular points in time. Public debt is created by the act of public borrowing or sale of government securities. Such a debt is amortized or retired by a reverse transfer in which government gives up money for the bonds, Treasury bills or other debt instruments. Under present conditions, the net effect of such debts is to further inflation on the one hand and hamper incentives (through the taxes necessary for interest payments) on the other. It is also argued that the financing of government activities by borrowing results in the transfer of costs from the present to future generations, who must pay higher taxes to meet principal and interest obligations. An alternative or supplement to increasing revenue by higher taxes, is the government's selling of some of its assets in order to repay debt. Assets may be sold internally (privatized, in a sense) or to foreign governments or investors. Included may be off shore land, gold, art treasures, historic jewellery, oil, valuable minerals, weapons, historic manuscripts or documents, and anything else a government possesses or can appropriate. Whatever method is used, it results in national impoverishment, as does the alternative of drastically reduced public expenditures.
[Industrialized countries] There is a current debt explosion which is not limited to a few countries, but rather is a worldwide phenomenon. Between 1974 and 1983 the ratio of central government debt to gross national or domestic product rose sharply in most industrial countries. For the seven largest industrial countries, that ratio rose from an unweighted average of 22% in 1974 to an average of 41% in 1983. In some of these countries the increase was quite sharp. In Japan, for example, the ratio rose from 12.2% of GNP in 1974 to almost 53% in 1983; in Italy it rose from 45.3% to almost 79%; and in Canada it rose from 16.3% to 35.5%. In the USA the ratio remained almost unchanged at around 28% up to 1981, but then it began to increase sharply, reaching almost 36% in 1983. In some of the smaller industrial countries the increases were even larger. From 1974 to 1983 the ratio increased by 50 percentage points Belgium; by 70 percentage points in Denmark; by 54 percentage points in Ireland; and by 34 percentage in Sweden.
By 1988, the net public debt as a percentage of Gross Domestic Product (GDP) was as follows for the seven largest industrial countries: USA 30%; Japan 24.6%; former Federal Republic of Germany 23.8%; France 26.6%; the UK 39.1%; Italy 92.0% and Canada 36.7%.
In 1996 Belgium's public debt was 130%, the highest ratio of debt to GDP in the European Union. In 1996, the National Bank had spent BEF 300 billion in gold reserves defending the exchange rate of the belgian franc in order for Belgium to qualify for the entry into the European single currency in 1999.
National debt is a government's debt to its own citizens. Unlike foreign debt, which has to be serviced out of export earnings, it is not a real burden on the economy, but a transfer between present and future generations. When borrowing is done for productive investment then the means of repaying the debt is also transferred to future generations. When borrowing is to pay bureaucrat's salaries then only the debt is transferred.
National debt is not a transfer between generations; it is an intra-generational transfer. If our grand-children, as a generation, inherit our national debt they also inherit dollar for dollar the assets (Treasury bond, etc.) represented by that debt. If our grandchildren pay extra taxes to service their inherited debt, they also, as a generation, get those same taxes back, dollar for dollar, as debt service paid on that debt. The net inter-generational transfer is exactly zero.
In periods of depression, the expansionary effects of government borrowing tend to bring about an increase in output. When governmental activities require capital outlays far in excess of usual expenditures, borrowing is not only virtually imperative if the outlays are to be made, but is entirely justifiable. The absolute figures of growth in government debt tend to exaggerate the actual growth in the debt relative to the economy as a whole.