The Difference Between the Deficit and the Debt

How They Impact the Economy

deficit vs debt

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budget deficit occurs when spending is greater than the revenue received for any given year. The spending that takes place that year subsequently is referred to deficit spending. The national debt effectively represents the accumulation of each year's deficit. When revenue exceeds spending, it creates a budget surplus. A surplus lowers the debt.

How the U.S. Deficit and Debt Are Different

The current U.S. budget deficit was $211 billion in August 2018. That's much lower than the record high of $1.4 trillion reached in FY 2009

The U.S. debt exceeded $21 trillion as of September 2018. That's more than triple the debt in 2000, which was $6 trillion. 

How the Deficit Affects the Debt

The Treasury must sell Treasury bonds to raise the money to cover the deficit. This is known as public debt since these bonds are sold to the general public.

In addition to the public debt, the government regularly loans money, in the form of Government Account Securities, to itself. It comes primarily from the Social Security Trust Fund

As Baby Boomers retire, they will draw down more Social Security funds, which should be replaced with . These benefits will be paid out of the general fund. To sustain Social Security into the future, payroll taxes must be raised or benefits must be lowered. Unfortunately, legislators have not agreed on an effective plan to meet Social Security obligations.

How the National Debt Affects the Deficit

The debt affects the deficit in three ways. First, the debt gives a better indication of the true deficit each year. You can more accurately gauge the deficit by comparing each year's debt to last year's debt. That's because the deficit, as reported in each year's federal budget, does not include all of the amount owed to the Social Security Trust Fund. That amount is called off-budget

Second, the interest on the debt is added to the deficit each year. About 5 percent of the budget goes toward debt interest payments. Interest on the debt hit a record in FY 2011, reaching $454 billion. That beat its prior record of $451 billion in FY 2008, despite lower interest rates. By the FY 2013 budget, the interest payment dropped to $248 billion, as interest rates fell to a 200-year low.

As the economy improved, interest rates rose, starting in May 2013. As a result, interest on the debt is projected to quadruple to $850 billion by FY 2021. That will make it the fourth largest budget item.

Third, the debt decreases tax revenue in the long run. That further increases the deficit. As the debt continues to grow, creditors become concerned about how the U.S. government will repay it. Over time creditors, claiming the deficit increases their risk, may demand higher interest rates so they can receive higher returns. Raising those rates may dampen economic growth.

How Debts and Deficits Affect the Economy

Initially, deficit spending and the resultant debt boosts economic growth. This is especially true in a recession. That's because deficit spending pumps liquidity into the economy. Whether the money goes to jet fighters, bridges or education, it ramps up production and creates jobs.

Not every dollar creates the same number of jobs. For example, military spending creates 8,555 jobs for every billion dollars spent. That's less than half the jobs created by that same billion spent on construction. For that reason, it's not the best unemployment solution.

In the long run, debt can damage the economy because of higher interest rates. Other issues occur if the U.S. government lets the value of the dollar fall. That means the debt repayment will be in cheaper dollars. As this happens, foreign governments and investors become less willing to buy Treasury bonds. That forces interest rates even higher.

Rising debts and deficits may endanger Social Security. As the government devotes more of its revenues to pay the mandatory cost of Social Security, it has less money on hand to stimulate the economy, and that can further slow growth.