Binary options lexicon: Understanding public debt and deficit

binary-options-lexicon-public-debt-deficit1What is the public debt? The public debt is a term referring to a state’s debt. It is money borrowed by the public authorities, which is done through the issuance of government bonds or treasury bills, for example. It is important to not confuse public debt with foreign debt, as the latter equates to the part of the total debt that is owed to creditors outside the country.

Additionally, it is very important to not confuse the notions of debt and deficit, as they are different. Deficit means the annual negative balance between revenues, such as taxes, when compared to state expenses such as public services and civil servant salaries. If revenues are less than expenses, there is a budgetary deficit. In contrast, public debt is a stock, and during a deficit, the government will borrow money to service it. The debt interest required to bridge the deficit will be designated in the state’s budget as a liability and therefore an expense.

The public debt, is it a boon or a handicap? Often perceived negatively by the media and public opinion, debt is considered only as a burden to be borne by future generations in the collective unconscious. However, when a government borrows it isn’t necessarily a bad sign. It could be the will of public policy makers to make investments in the future, in sectors like education, research or investment in infrastructure, thus generating economic growth

How do nations borrow? Generally states borrow by issuing securities, unlike households that borrow money from commercial banks. Several financial products exist such as bonds, for example, which involve paying interest until maturity.

A European framework: The 1992 Maastricht Treaty created a European framework for the public debt, and provided for the creation of the Euro and the European Stability and Growth Pact (1997). The Maastricht Treaty established the rules to be respected by Euro zone member states in terms of budgetary policy. In fact, these states must not have a public debt greater than 60% of gross domestic product (GDP), which measures the wealth creation in the country as a whole. At the same time, member states cannot have a deficit greater than 3% of their GDP.

Some key numbers:

Public debt in the Euro zone: The amount has risen to 8.601 Billion Euros, which is 92.2% of GDP. *
Public debt in the 27 European countries: The amount has risen to 11.0118 Trillion Euros, which is 85.9% of GDP. *

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