Deficit – Debt: What’s the Difference?

Deficit….Debt.  Are they the same thing, and if not, then what’s the difference?

The terms National Debt and Budget Deficit can be very confusing when it comes to discussing United States government spending.  The terms often get used interchangeably, but they are not at all the same thing.  Even among politicians and news reporters, it’s not unusual for them to refer to the National Debt when they are really talking about the Budget Deficit, and vice versa.  So in this post, I want to explain the difference between the two terms.

In a nutshell, the Budget Deficit is the shortfall between what the government spends during a single year compared with what it brings in during a single year.  The National Debt, on the other hand, is the accumulation of all the Budget Deficits for every year since the United States has been in existence.

To illustrate this in simple terms, let’s look at it in terms of your personal finances.  Assume that you make $50,000 this year, but you spend $53,000.  That extra $3,000 you spend above what you make is the equivalent of your budget deficit.  Because you would have to “borrow” $3,000 to cover the shortfall, you would also create debt of $3,000.  Now, suppose you do the exact same thing next year…that is, you spend $3,000 more than you make.  Once again, you would have a budget deficit of $3,000, but your debt would have increased to $6,000 ($3,000 shortfall for two consecutive years.)  If you continue this practice for five consecutive years, you would have a budget deficit of $3,000 each year, but your debt at the end of five years would be $15,000.  (I’m ignoring the effects of taxes and interest for the sake of simplicity.)

The same thing holds true with the federal budget.  In 2010, the federal government is expected to spend $3.6 trillion while bringing in only $2.4 trillion in taxes and other revenues.  That leaves a shortfall, or Budget Deficit, of $1.2 trillion.  The government will then have to borrow that $1.2 trillion from the public or from other governments by selling government bonds or similar debt instruments.  The $1.2 trillion that the government borrows then gets added to all of the existing debt from previous years.  The sum total of all of this government borrowing is the National Debt.

As I write this article, the National Debt is over $12 trillion.  Written out in digits, it looks like this: $12,000,000,000,000.00.  It’s a staggering amount of debt, and it continues to grow uncontrollably.  The rate of growth in the National Debt is not sustainable, and a day of reckoning awaits us.

If you are tired of the ballooning budget deficits and national debt, please let the President and Congress know by adding your name to The National Debt Petition.