Ever seen the news say the government is blowing billions on something ridiculous, while the country is drowning in debt? People got furious and panicked. However, do you know that almost every country on Earth has debt? India, Germany, Switzerland, Qatar. Even big, rich nations aren’t safe from debt. Japan owes twice its entire economy, and the U.S.? A cool $36 trillion debt and still counting. Sounds crazy, right? So, have you ever wondered why countries are in debt? Why don’t they print unlimited money? Is debt really that bad? So, in this article, I will discuss all you need to know about debt.
Section 1. What is the National Debt? If we mention a country’s debt, we call it “national debt.” National debt, also called public debt, government debt, or sovereign debt, is the total money a federal or central government owes. Just like people take out loans when they need money, governments borrow when they spend more than they earn. But instead of borrowing from a single bank, countries get loans from various sources, like other nations, big financial institutions, and even their own citizens. National debt only includes federal or central government debt. So, U.S. national debt only includes the U.S. Federal Government’s debt, but it doesn’t include local or state debt, like California's or Texas’s debts. Yeah, states or provinces can take on debts for their own, which is different from federal or central government debt. National debt also doesn’t include American citizens’ personal debt, like credit cards, student loans, or mortgages. So, now you’ve understood what the national debt is.
Your next question is, why do countries borrow in the first place?
Section 2. Why do countries borrow money? Why do governments need to borrow money when they can just print more money? Well, when the governments print money mindlessly, they think they have unlimited money and will spend recklessly, flooding the economy with cash. This will cause hyperinflation, make prices skyrocket, and crash the economy. As a result, investors and foreign countries will lose trust and think of the money as worthless as toilet paper. This already happened in Venezuela and Zimbabwe. Borrowing, however, keeps them disciplined as debt comes with interest, which forces the government to manage its money more responsibly, as they need to repay the debt.
Now, let’s look at why governments borrow in the first place. The first reason is to cover budget deficits. A government’s main income comes from taxes, but sometimes it’s not enough to cover expenses. This is called a “budget deficit.” For example, if the government collects $3 trillion in taxes but needs $4 trillion to fund education, healthcare, and public services. That leaves a $1 trillion gap. So, what are the options? Cutting spending? That means fewer services, worse education, and underfunded healthcare. People won’t be happy and will probably protest the next day. Raising taxes? That makes life harder for everyone and might lead to even bigger protests. So, the easiest solution is to borrow money to cover the deficit.
The second reason is to invest in growth. Borrowing isn’t always a bad thing. Imagine your country needs roads, schools, and hospitals, but the government has no money and refuses to borrow. Instead of building them now, they would have to wait years to save up. In the meantime, people struggle with bad roads, a lack of schools, and poor healthcare. But if the government borrows, it can build these things now, helping people sooner and improving the economy faster. These investments can help grow the economy, which in turn increases tax revenue and eventually makes it easier to pay off the debt later.
The third reason is to handle crises and emergencies. Sometimes, governments have no choice but to borrow. When unexpected events like wars, crises, natural disasters, or pandemics happen, they need to act fast. For example, in 2020 alone, the U.S. borrowed $3.8 trillion, which is about 18% of its GDP, for COVID-19 relief, stimulus checks, and business aid. Without this, the economy could have been worse, and many more people would have lost their jobs.
The fourth reason is to pay off existing debt. You’re not the only one who takes loans to pay off old loans; the governments have mastered this trick better than you. So, let’s say a country borrowed money in 2010 with a repayment deadline in 2020. But when 2020 arrives, it can’t afford to pay it back. What does it do? Of course, take another loan in 2020 to repay the 2010 debt, and this cycle will keep going. As long as the country manages its debt responsibly, it’s not necessarily a problem. But if debt spirals out of control? Well, that’s exactly what happened to Sri Lanka, which defaulted on its $51 billion external debt in 2022, leading to mass protests and chaos.
Fifth, to control interest rates and inflation. Sometimes, governments borrow money as a financial tool, not just because they’re short on cash. By issuing bonds, they can control inflation, stabilize their currency, and influence interest rates. For example, when inflation is too high, governments can issue bonds to pull money out of the economy, reducing inflation. On the other hand, when the economy is too slow, governments can borrow more to inject more money into the economy and stimulate growth. Of course, it’s not that simple, but that’s the simplest logic.
Section 3. Is the national debt a bad thing? Well, not really, because debt can be good or bad depending on how it’s used and whether a country can manage it properly. Debt can be beneficial if used and managed wisely. As I mentioned, when governments borrow to build infrastructure and public services, it can boost the economy. In times of crisis, like COVID-19, borrowing helps stabilize the economy and support businesses. So, as long as the debt is manageable, it’s good. But too much debt is also dangerous. If a country keeps borrowing just to repay old debt, it falls into a debt trap. When debt grows too large, a country spends more on interest than on essential services like healthcare and education. If investors lose confidence, they doubt whether the country can repay its debt, which lowers its credit rating. Yeah, countries also have credit ratings, just like your credit score at the bank. A bad rating makes borrowing harder, so investors stop lending or demand higher interest rates, leading to a debt crisis and possible default, which means the country gives up on paying its debt, like Sri Lanka in 2022.
Now, how much debt is too much? There’s no exact number, but one way to measure it is the debt-to-GDP ratio, comparing a country’s total debt to the size of its economy or GDP. So, for example, let’s say a country has a 60% debt-to-GDP ratio; it means if that country has a $100 billion GDP, then its debt is around $60 billion. Many economists consider 60% or lower a safe level, but it’s not a strict rule. Some countries, like the United States, have a debt ceiling, which is a law that sets a limit on how much debt the government can take on. If the debt hits this limit, the government can’t borrow any more in order to make the U.S. more responsible in managing its debt, but this is quite useless because the U.S. just raises the ceiling every time to avoid default.
So, in conclusion, debt is actually a double-edged sword. Used wisely, it can help a country grow and thrive. Used recklessly, it can lead to economic disaster. So next time you hear someone ask, “Why does our country have debt?” then you already know the answer. It’s not about having debt, it’s about knowing how to manage it. And also, maybe you’re still wondering why some countries handle high debt just fine while others collapse, and other things about debt.