Public debt is the debt incurred by the State to meet its needs.
In other words, it represents the resources needed to keep the state machinery, made up of services and investments, functioning. The difference between a State’s revenues and expenditures is called the primary balance. In the calculation, interest on previous debt that a State pays to its creditors must be added. A deficit occurs when revenues are less than the sum of expenditures and interest expenses. Public debt can also be defined as the stratification, year after year, of deficits.
Therefore, it is the debt incurred by a State to meet its needs. The holders of public debt, i.e., the creditors of the State in question, are all those entities that have financed the State in some way. Thanks to public debt, every State finances its economic growth, the services it offers to citizens, and investments: for this reason, correct management of public debt is among the most important tasks of every government. The instruments through which a State finances its public debt are diverse. The far and away most used instrument is undoubtedly the issuance of medium-long term or short-term bonds.
However, it is also important to understand what the public debt government bonds are. For example, in the case of the Italian State, the medium-long term instruments are mainly BTPs (Buoni del Tesoro Poliennali, multi-year Treasury bonds with maturities ranging from 3 to 50 years), CCTs (Certificati di Credito del Tesoro, Treasury credit certificates) or CCTeUs. For shorter maturities, the Ministry of the Treasury instead uses BOTs (Buoni Ordinari del Tesoro, ordinary Treasury bills with maturities from 3 to 12 months) and CTZs (Certificati del Tesoro Zero Coupon, zero-coupon Treasury certificates with 24-month maturities). Similar instruments are found in all other nations around the world (famous examples include US Treasuries and German Bunds). In recent years in Italy, BTPIs € (Buoni del Tesoro Poliennali indexed to European inflation) and BTP Italia (Buoni del Tesoro Poliennali indexed to Italian inflation) have also become widespread, which take into account the evolution of inflation.
Differences between Deficit, Public Spending, and Debt Interest
As we have seen, through its debt, every State finances its deficit, which is the difference between its revenues and its expenditures. If a State’s annual budget is in deficit, meaning annual expenses are greater than revenues, then debt must be resorted to, which thus increases to compensate for the deficit.
A State’s expenditures include both public spending and interest on debt (i.e., on various bonds such as BOTs or BTPs): for this reason, out-of-control debt can become a great risk for a public budget as it can lead to an increase in the deficit due to mounting interest and thus a negative cycle that can even lead to a State’s default (when it becomes insolvent and refuses to pay its creditors). In several cases, some countries in the world have been obliged, to avoid being cut off from international investments, to make massive cuts to their spending and their welfare state (for example, closing schools, hospitals, and other activities related to national public service).
To avoid a similar scenario, governments generally try to keep their debt levels under control through various instruments, such as significant austerity measures. Public debt management is also strongly influenced by monetary policy decisions. In fact, a cut in the cost of money, i.e., interest rates, although aimed at price stabilization, leads to a lower cost of public debt as the interest paid on it decreases. When a central bank – for example, that of the United States – indirectly reduces the cost of money, it diminishes the burden of public debt incurred in its own currency. In the case of the European Union, it is the European Central Bank – ECB that regulates the cost of money and thus uses the monetary lever at a continental level (simultaneously towards all countries that use the euro as their currency, the Eurozone).
