How the state pays its bills: budget, deficit and debt

Ana, 34, hears that Slovenia’s budget deficit in 2025 was 2.5% of GDP and its debt 65.7%. A neighbour says: “The state is bankrupt.” Another says: “Debt does not matter.” What do these two numbers mean?

Revenue, spending, deficit and debt

A government budget lists what the state collects and what it spends. Revenue comes mainly from taxes and social contributions. Spending covers pensions, health, education, defence, roads, interest on debt and more. When the state also uses taxes and spending to steer the economy, that is fiscal policy.

If spending is larger than revenue, there is a budget deficit. If revenue is larger, there is a surplus. The state borrows to cover a deficit. The total of past borrowing still owed is the government debt.

Think of a bathtub: the deficit is the tap, and the debt is the water level.

In 2025, euro area governments collected revenue worth 46.9% of GDP and spent 49.8%. Slovenia collected 47.1% and spent 49.6% (Eurostat).

How governments borrow

A state borrows by selling government bonds: long-term bonds and short-term bills. They are often sold at auctions. Buyers include banks, pension funds, insurers, foreign investors and households. A central bank may hold them too, after QE. When a bond matures, the state usually repays it by selling a new one. This is called rolling over.

The yield is the interest rate investors demand. It rises if they see more risk or expect more inflation. A sovereign rating is an opinion by an agency on how likely a state is to default. A downgrade can raise borrowing costs. In May 2025 Moody’s lowered the United States from its top rating, Aaa, to Aa1.

Debt compared with the economy

Debt-to-GDP compares debt with a year’s output, as you might compare a mortgage with a year’s income. It falls when GDP grows faster than the debt. It rises when the interest rate on the debt (r) is above nominal growth (g) and the state does not run a surplus before interest payments. The budget balance before interest is called the primary balance.

There is no single safe level of debt. Japan’s gross debt is about 206% of GDP (IMF, 2025) and it has not defaulted. Most of its debt is in its own currency and held inside the country. Argentina has defaulted at lower ratios, partly because much of its debt was in dollars. Who holds the debt, its currency, its maturity, the interest rate, growth and the state’s record all matter.

EU rules and honest income

EU countries agreed on two reference values: a deficit of 3% of GDP and debt of 60%. A reform in force since 30 April 2024 asks each country for a medium-term plan, covering four or five years and up to seven with reforms and investment. The Commission watches one yardstick, the path of net spending. In 2025, eleven EU countries had deficits of 3% or more and twelve had debt above 60% (Eurostat). The 60% is a legal reference value, not a cliff.

The shadow economy, such as cash-in-hand work without an invoice, reduces tax revenue. The worker also loses pension rights, sick pay and credit options, because banks look at declared income. In Slovenia, invoices paid in cash have had to be confirmed online with the tax authority since 2 January 2016.