The United States' national debt has crossed the $40-trillion mark for the first time, according to US Treasury data. A government's debt can sound like a simple number, but it is the result of years of borrowing. Governments borrow to meet expenses when their revenues are not enough to cover their spending. They then have to pay interest on that borrowing and eventually repay the principal amount.
So, what exactly is government debt, why do governments borrow, who lends them money and how do they repay it?
What is government debt?
Government debt is the total amount of money a government has borrowed and still owes.
A government collects money mainly through taxes and other revenues. It uses this money to pay for public services and programmes, infrastructure, salaries, defence, subsidies and other expenses. But when a government's spending is higher than its income in a particular year, it runs a
fiscal deficit. It needs to borrow to make up for the shortfall.
That borrowing adds to the government's outstanding debt. For example, suppose a government collects $100 in taxes and other revenue but spends $120. It has a $20 deficit. If it borrows $20 to meet that gap, the borrowing becomes part of its government debt.
How does a government incur debt?
Governments usually incur debt by issuing securities such as bonds, bills and other debt instruments. Investors buy these securities and, in return, receive interest. When the security matures, the government is expected to return the principal.
The US Treasury, for example, borrows by selling Treasury bills, notes and bonds. These securities are bought by investors in the US and abroad.
This is different from taking a loan from one particular bank. Government borrowing takes place through large financial markets, where many investors can buy government securities.
Who does a government owe this money to?
A government can owe money to a wide range of lenders.
These can include:
• Banks and other financial institutions
• Pension and mutual funds
• Insurance companies
• Businesses
• Foreign investors and foreign governments
• The country's central bank
• Other government institutions or funds
The exact mix varies from country to country. In the US, the $40 trillion figure includes debt held by the public as well as intragovernmental debt, which is money owed by one part of the federal government to another. More than $32 trillion of the total is held by the public.
Foreign investors are, therefore, only one part of the group that lends money to a government. A large share can also be held domestically.
How does a government repay its debt?
A government has two main obligations on its debt: interest and principal. It has to make interest payments to investors according to the terms of the securities it has issued. When a bond matures, the government also has to repay the principal.
But governments do not necessarily pay off all their debt at once. A government can issue new debt when old debt matures. The money raised from the new borrowing can be used to repay the maturing debt. This is known as refinancing or rolling over debt.
This means a government can continue to have a large outstanding debt even when it is regularly paying its obligations.
Tax revenues and other government income can also be used to pay interest and repay debt. The key issue, therefore, is not simply whether a government has debt. Governments around the world borrow regularly. The bigger question is whether they can continue to service that debt without creating an unsustainable fiscal burden.
What is the difference between a fiscal deficit and government debt?
The two terms are related but not the same.
A fiscal deficit is the amount by which a government's spending exceeds its revenue during a particular period, usually a financial year. Government debt is the accumulated stock of borrowing over time.
Think of it this way: the deficit is the new borrowing requirement for a particular year, while debt is the amount that has built up from borrowing over several years.
So, if a government runs a deficit of $10 trillion this year, that does not mean its total debt is $10 trillion. The $10 trillion would be added to the debt it already has, subject to other adjustments.
What is a debt ceiling?
A debt ceiling is a legal limit on how much a government can borrow. Not every country has such a limit in the same form. The US has a statutory debt ceiling set by the Congress.
The important point is that the US debt ceiling is not the same as a limit on government spending.
When Congress approves spending and other obligations, the government may need to borrow money to meet them. The debt ceiling determines how much the Treasury can borrow to meet those already-authorised obligations.
So, raising the debt ceiling does not itself approve new spending. It allows the government to continue borrowing to pay bills that have already been authorised.
What happens when a government reaches its borrowing limit?
If a government reaches a legal borrowing limit, it may not be able to raise additional debt unless the limit is increased or the law is changed.
In the US, when the debt ceiling is reached, the Treasury can use certain temporary measures to continue meeting the government's obligations. But if those measures run out and the borrowing limit remains unchanged, the government could eventually struggle to make some payments on time.
That creates the risk of a default -- a situation in which the government fails to meet an obligation when it is due.
A US government default could have consequences well beyond the country because US Treasury securities are widely held by investors around the world.
Why is the US debt rising so fast?
The US has been running large budget deficits for years, meaning the government has regularly spent more than it has collected in revenue.
Wars, economic downturns and the Covid-19 pandemic led to sharp increases in borrowing. More recently, spending on programmes such as Social Security, Medicare and defence, along with rising interest costs, has added to the government's financing needs. Tax cuts can also increase borrowing if they reduce government revenue without corresponding spending cuts, news agency Reuters reported. On the US national debt crossing $40 trillion, President Donald Trump told LiveNOW from FOX on Friday, “It has been a problem for 35 years.”
“The way you handle debt is through growth, and we are having tremendous growth. We have never seen the kind of growth we are having now. This growth will solve it very easily,” he said.
 "US national debt crosses $40 trn: What govt debt means and how it works")
