What is the Difference Between Debt and Deficit?

Jessica Ellis

Debt and deficit are two financial terms that are often used interchangeably, but actually have different meanings. Deficit is calculated on a periodic basis and reflects the negative difference between spending and revenue. Debt is the total amount owed of all money owed since the inception of an organization, business, or government. A yearly deficit can contributed to an overall increased debt, while a yearly surplus can help reduce debt.

Man climbing a rope
Man climbing a rope

The basic concept that divides debt and deficit can be understood by a look at personal finances. If a person makes $1,500 US Dollars (USD) per month in income, but spends $1,700 USD, he or she will have a $200 USD deficit each month. This overspending may be accomplished through the use of credit cards, but continues to sap away at total worth and assets. Over a year, this person would accrue an annual debt of $2,400 USD based on a monthly deficit of $200. It's important to remember, however, that the total repaid debt for this person would likely be significantly higher, thanks to the interest accrued on the credit card balances.

Debt and deficit are most often brought up in discussions about governmental spending. Governments receive income each year, through taxes, fees, and other sources. Governments also spend money each year, through social programs, defense, infrastructure, and interest payments on existing debt. When a government takes on more expenditures than revenues, it creates a deficit. Debt and deficit are constant concerns in this process, since the increase of one may lead to the increase of the other.

Governments are able to finance expenditures despite a deficit by borrowing money from citizens, from certain governmental programs, and from foreign lenders. Borrowing money from citizens is generally done through the issuance of bonds, which are debt securities available to the public and to businesses. These usually offer excellent interest rates that require the purchase price, plus interest, to be paid back to the lender after a certain period of years. Certain programs, such as the Social Security retirement fund in the United States, have provisions that allow the government to borrow stored funds to cover deficit spending, and later repay them with interest.

The general downside to financing deficit is that it allows the expansion of debt, at least in the short term. Some economic theories suggest that deficit spending is actually vital to reducing the debt overall, as long as the spending goes to funding programs that stimulate the economy and thus put the country in a better position to pay down the debt. Unfortunately, it is difficult to predict which stimulus programs will actually succeed ahead of time, thus making every program that fails an increased weight on the debt. The process of managing debt and deficit is one of the major concerns of most governments worldwide, but widely varying theories as to how these concepts are best handled leads to frequent stalemates and political wrangling.

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