The Difference Between the Deficit and the Debt

How They Affect the Economy

deficit vs debt
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budget deficit occurs when spending is greater than the revenue received in that year. When spending exceeds revenue, it's called deficit spending. The national debt is the accumulation of each year's deficit.

When revenue exceeds spending, it creates a budget surplus. A surplus reduces the debt.

How the U.S. Deficit and Debt Are Different

The 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 on March 15, 2018. That's more than triple the $6 trillion debt in 2000. 

How the Deficit Affects the Debt

The U.S. Treasury must sell Treasury bonds to raise the money to cover the deficit. This type of financing 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 to itself. This intragovernmental debt is in the form of Government Account Series (GAS) securities. Most of it comes from the Social Security Trust Fund. That happened in the past, when provided more than enough income to cover all Social Security benefits. That's because there were more baby boomers than there were retirees.

But as baby boomers retire, they will no longer pay enough in taxes to cover the benefits. As that happens, Social Security will add to the deficit and the debt. To avoid this, one of three things must happen. Either payroll taxes must be raised or benefits must be lowered. Otherwise, other programs must be cut to pay for Social Security. Legislators are still arguing over the best solution.

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 the previous 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.

Third, the debt decreases tax revenue in the long run, which 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 that 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 boost economic growth, especially in a recession. 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 $1 billion spent. That's less than half the jobs created by $1 billion spent on construction. For that reason, the military is 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. One effect is that the debt repayment will be in cheaper dollars. As this happens, foreign governments and investors become less willing to buy Treasury bonds, which 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, which can further slow growth.