The public debt it is the sum of all the money that a State owes to those who have lent it money. It is usually expressed with respect to GDP of that State. When a government spends more than it accumulates (thanks to taxpayers’ taxes and other revenues), it must borrow money to cover the difference; this money is obtained through the issuance of short, medium and long-term government bonds (i.e. bonds). Public debt is necessary to finance a state’s public spending and is essential to support the economy and services to citizens.
Al 2024The Italian public debt And very high; in fact, in August 2024, the public administration debt was equal to 2,962,499 million euros. This means that although Italy earns money from taxes and other revenues, it still owes a huge sum to cover its past debts.
Public debt in short: what it is for
Public debt is usually expressed as a percentage of Gross Domestic Product (GDP) of a country. This ratio is used to indicate how much debt a government has relative to the total size of its economy.
If the annual expenses incurred exceed the income (in this case the budget is said to be in deficit), then you need to borrow money to compensate. It is important to remember that a state’s expenditure includes both public spending and interests to be repaid on the previous debt created.
The main rules to respect for this debt to GDP ratio are:
- The deficit should not exceed 3% of GDP, except in the case of exceptional circumstances (such as earthquakes or epidemics).
- Public debt must be less than 60% of GDP. When it is higher, the country must gradually reduce the difference following specific adjustment trajectories, and this is precisely the case for Italy.
In Italy, in fact, the data at December 31, 2023 gives a report Debt/GDP of 134.80%.
Who are the creditors to whom the government has become indebted?
To make up for the deficit, the Treasury Departmentwith a dedicated general management, issues i Government bonds and manages the liabilities of the central state administrations. These issued securities can be purchased directly by national and international banks, by private investors (such as citizens) or can be purchased indirectly through mutual funds, pension funds or any other investment that contains sovereign bonds.
In Italy, for example, there are 8 different categories of government bonds that can be purchased by both private individuals and institutions.
Obviously, in general terms, we can say that these sums that the government borrows have, as with any other credit, a interest rate reference and one duration within which the government will return the amount to the creditor.
Furthermore, if the country is in a period of crisis, there are bodies such as the International Monetary Fund (IMF) that lend money to governments to avoid recession. Finally, other governments may decide to buy part of another country’s public debt as part of their own foreign exchange reserve.
But why should a government go into debt for its own economic development?
It would seem like a paradox to think that to develop economically it is necessary to go into debt, but this is not really the case, because it is important to be clear on the reasons why a State decides to borrow sums:
- Governments often go into debt to finance infrastructure projectssuch as roads, bridges and hospitals, which can stimulate long-term economic growth.
- In times of recession, government debt can be used to finance economic stimulus measuressuch as subsidies and work programs, to support employment and demand.
- Moderate debt allows governments to deliver essential public servicessuch as healthcare and education, which can improve the quality of life and productivity of the workforce.
- In some situations, governments can use debt to invest in projects that will generate returns in excess of the costs of the debt itself, thus contributing to economic growth.
- Issuing debt can help manage inflation and stabilize the economy by providing a source of financing without immediately raising taxes.
In summary, if managed prudently, public debt can be an effective tool for promoting economic development and supporting long-term growth; on the contrary, if the country were to become over-indebted it could lead to the state’s financial default.
