---
title: "What is public debt?"  
description: "What is public debt?"  
author: "Baishakhi Ghosh"  
published: 2024-08-30  
updated: 2024-09-04  
canonical: https://answers.mindstick.com/qa/113426/what-is-public-debt  
category: "economy"  
tags: ["economy"]  
reading_time: 2 minutes  

---

# What is public debt?



## Answers

### Answer by Lakshya Sharma

**Public debt**, otherwise known as [government](https://www.mindstick.com/news/1911/upi-transaction-would-cost-zero-service-charges-clarifies-government) debt, national debt, and sovereign debt, refers collectively to the total amount of money that a state owes to a creditor who is external. This takes place when a government borrows some money to finance its budget deficits or when its expenditures surpass revenues. Governments borrow from both domestic and international [investors](https://www.mindstick.com/news/2413/with-collapse-of-ftx-genesis-alerts-investors-to-the-possibility-of-bankruptcy-without-new-funding), institutions, or other governments by issuing bonds, treasury bills, or other securities.

There are mainly two types of public debt:**1. Internal Debt:** Money lent by lenders within the country comprising individuals, institutions, and domestic banks.**2. External Debt:** Money owed to foreign governments, international financial institutions such as the International Monetary Fund or the World Bank, or foreign investors.

Governments generally borrow for the following reasons:

**Financing Budget Deficits:** When there is a shortfall in tax revenues that cannot meet the level of expenditures, governments necessarily must borrow to finance priority services, [infrastructure](https://www.mindstick.com/news/2313/a-cybersecurity-and-infrastructure-security-agency-will-monitor-the-us-midterm-elections), social programs, and debt servicing.

**Economic Stimulus:** During an economic recession or crisis, the government may resort to increased public spending through borrowings as a means of stimulating activity and accelerating growth.

**[Investment](https://www.mindstick.com/articles/157040/6-investments-to-make-to-improve-your-customer-service) in Long-term Projects:** Large infrastructure or [development](https://www.mindstick.com/blog/359/iphone-development-introduction) projects often require huge [investments](https://www.mindstick.com/news/2678/5g-services-in-india-to-attract-rs-1-5-lakh-crore-in-investments-in-2023), which the governments generally fund through their borrowings, as these are also expected to benefit the economy in the long run.

## Impact of Public Debt:

**Pros:** Public debt can be useful in facilitating economic growth, especially during times of economic contraction or when applied to productive projects like infrastructure, [education](https://www.mindstick.com/articles/85754/investing-in-higher-education), or healthcare. It allows for the smoothing of economies by countries, if well managed, and helps to avoid sharp, immediate austerity that hurts the economic activity.

**[Disadvantages](https://www.mindstick.com/blog/300577/advantages-and-disadvantages-of-web-3-0):** High levels of public indebtedness make fiscal [management](https://www.mindstick.com/articles/23350/how-to-choose-a-project-management-platform-for-your-business) difficult. The increased indebtedness may raise interest payments and constrict the ability of the government to spend on essential services, and hence increase taxes or resort to austerity. Such situations would also mean increased cost of borrowing and loss of [confidence](https://www.mindstick.com/articles/269582/the-keys-to-having-contagious-confidence) in the ability of the government to pay its debts in due time if investors perceive the debt as unsustainable.

It is a two-edged sword whereby well-managed public debt may spur growth, but large levels of it, apart from being ill-managed, result in considerable financial constraint.


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