What is Government Debt

Government Debt: As the largest issuer of bonds (in most countries) the central government deserves special mention. Because the central government is the largest issuer by a large margin, the local bond market essentially is a central government bond market (we call it the LCC bond market), and all other non-central government bonds are referenced on the government bonds. This is so in respect of rates and terms to maturity (often called look-alikes).

The amount of LCC bonds in issue is a reflection of the accumulation of the government budget deficits. LCC bonds are not the only instruments used to fund the deficit (the others are treasury bills and foreign loans in the main), but they constitute the main instrument. The deficit plays an important role in fiscal policy (defined as the taxing, spending and deficit financing programmes of government and their influence on economic growth and employment).

The management of the outstanding debt of government (called debt management policy) also plays a major role in the financial sector of the economy and therefore has an influence on the real sector. For example, a huge debt in relation to GDP will tend to “crowd out” the private sector. Also, the distribution of the debt and the term of the debt play a role in terms of money creation by banks. Debt management policy can be used to contribute to the broad economic goals of government or detract from sound policies if poorly managed.