The Difference Between Public and Private Debt

Understanding the difference between public vs private debt is important for anyone managing finances, whether you're running a business or planning personal investments.

Knowing these distinctions can help you make smart financial choices, whether you're looking at loans for growth or understanding how government debt impacts your taxes.

In this article, we break down what public and private debt mean, their examples, benefits, and risks. Whether you're a business owner or an individual borrower, this can help you make financial decisions with confidence.

Public debt

Public debt, or national debt, is the total amount of money that a country’s government owes. It can be taken on by the central government or any other government body at different levels, like borough or local councils.

This debt can be used to fund public expenditures such as infrastructure projects, healthcare, and education.

Public debt affects how well an economy grows. When managed properly, it can encourage investments that make businesses more productive and create jobs. But if public debt gets too high compared to the country's total income (GDP), it can stress government finances. This might lead to:

• Higher taxes
• Reduced spending on essential services
• Economic instability

As of the end of Quarter 4 (October to December) 2023, the UK general government gross debt was £2,720.8 billion.

What is the difference between public debt and government debt?

The terms public debt and government debt are often used interchangeably, but there is a subtle difference.

• Government debt refers to the debt owed by the central government.
• Public debt includes all levels of government debt, directly or by government agency.

What is an example of public debt?

Public debt comes from many different sources. For example, when the government issues bonds, it owes money to the people or institutions that buy those bonds. Another example is Sovereign Debt, which is when one country borrows money from another country.

Although the public technically owns the debt, it is seen by the world as being tied to the country as a whole. The decision to create public debt is made by a few government officials, but the burden of repayment falls on the taxpayer.

Private debt

Private debt is money borrowed by individuals, private businesses, or non-governmental organisations.

What is an example of private debt?

An example of private debt would be a business loan taken out by an SME to fund its operations, expansion, or other business activities. Another example could be a personal loan taken by an individual to buy a house or a car.

The growth of private debt markets has accelerated with the growth of global finance and increased access to credit. In the UK, private debt has been key to helping small businesses and driving consumer spending. This supports economic growth and increased employment.

Why choose private debt over private equity?

Businesses might prefer private debt over private equity for several reasons:

• Keep ownership. Taking on this type of debt doesn’t dilute ownership, so business owners keep full control of their company.
• Predictable terms. It usually has set repayment schedules and interest rates, making it more predictable compared to the variable nature of returns and conditions in private equity investments.
• Quick access. Funds can often be obtained quicker and with fewer conditions than raising private equity.

What are the advantages of private debt over public debt?

One of the key advantages of private debt over public debt is flexibility.

Private debt can come with terms that are tailored to the specific needs of the borrower. For instance, businesses can get loans with repayment plans that fit their cash flow cycles.

Additionally, it can be obtained without the long processes that often come with creating public debt.

Differences between public and private debt

Basis	Public Debt	Private Debt
Meaning	A debt borrowed by government bodies for public development and services.	Loans or debt are provided by private entities such as banks, firms, individuals, or private businesses.
Issuer of debt	Issued by government entities, public organisations, and central banks.	Issued by individuals, private businesses, and private banks.
Debt issued through	Typically through bonds which can be bought by individuals and institutions.	Through loans and debt securities.
Use of debt	Used for public infrastructure, services like education, and other public needs.	Used for personal reasons, business expansion, and private ventures.
Period of debt	Long-term borrowing options are available for governments.	Usually shorter-term loans for individuals and businesses.
Interest rates	Generally lower interest rates compared to private debt.	Typically higher interest rates are due to greater risk associated with private lending.

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Your common questions answered

Are bank loans private debt?

Yes, bank loans are private debt.

When people or businesses borrow money from banks, they are taking on private debt.

These loans are part of the broader private credit market, which includes all types of private lending and financing options.

What is Private Debt vs Private Credit?

Private debt and private credit are two sides of the same coin.

• Private credit is when non-bank lenders, like private companies or hedge funds, lend money.
• Private debt is when private companies borrow money.

Both involve a variety of loans and lending methods, but one is about giving money, and the other is about receiving it.

Are there any risks to private debt?

Private debt can come with risks for the applicant.

When a loan is provided by family or friends, missed repayments can cause tension. Debt incurred with a credit provider may result in high levels of interest, charges for missed payments or demands for security.

Lenders may ask for security over an asset or a guarantee in return for a secured loan. If security is given, the borrower can risk their home if they can't repay their debts.

The risk doesn’t only lie with the debtor. The creditor risks non-repayment of funds or the need to issue lengthy and costly legal proceedings when they agree to make a loan. If a company goes into liquidation or a person enters bankruptcy, a creditor will lose all or the majority of their investment.

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