What is Government Debt

• Definition: The total money that the government owes.
• Budget Deficit: When the government spends more than it collects.
• Budget Surplus: When the government spends less than it collects.
• Real World Example: Think of it like your pocket money! If you spend more than you have, you borrow (deficit). If you save, you have extra (surplus).

 Bonds and IOUs

• Definition: A bond is a promise to pay back money at a specific date with interest.
• How it Works: People buy bonds, effectively lending money to the government.
• Real World Example: Imagine giving your friend a note saying, "I'll pay you $10 in a week."
• That's like a bond, but governments use it on a bigger scale!

 Why use GDP

• Reasoning: Comparing debt to the economy's size (GDP) gives a better picture.
• Real World Example: If a giant has $1000 and a dwarf has the same, that money means something different for each. Debt to GDP helps us see how big a burden the debt is to the economy.

 Effects on the Debt/GDP Ratio

• Debt to GDP Ratio: How the economy can pay off its debt.
• Changes: This ratio can increase if debt rises faster than GDP or if GDP decreases because of recession.
• Real World Example: Greece had a high debt to GDP ratio, making their debt more burdensome than a country with a bigger economy like the UK.

 Debt Servicing

• Definition: Paying back the borrowed money and interest.
• Opportunity Costs: The money could have been spent on things like schools and healthcare.
• Real World Example: It's like spending all your money on candy and not having enough for a new book.

 Inflation and Currency Depreciation

• Monetizing the Debt: Printing more money to pay off debt, which can lead to inflation and currency loss.
• Real World Example: Imagine printing your own money to buy things; soon, your money might not be worth much!

Credit Ratings

• Explanation: Credit agencies grade governments on their risk to lenders.
• Real World Example: Just like in school, getting an 'A' is best! A lower grade means higher interest rates.

 Impact on Future Taxation and Government Spending

• Austerity Policies: Cutting spending and raising taxes to reduce debt.
• Real World Example: Imagine having to cut down on outings and save more pocket money to pay back a debt.