In recent years, the debt and deficit have become even more prominent topics in the political arena. They have been discussed in political debates, analyzed in news articles and are often topics of discussion among everyday citizens. But, despite their frequent discussions, many people don’t fully understand the difference between the two. This article will serve to demystify the biggest confusion and simply explain the differences between the national debt and the federal budget deficit.
What is the difference between the national debt and the federal budget deficit?
The most succinct way to explain the difference between the two is that the national debt is the total amount of money owed by the federal government, while the federal budget deficit is the difference between spending and revenue. The national debt is the accumulated deficit over many years, while the budget deficit is what the current year’s deficit is compared to last year’s. It is important to note that the federal budget deficit is not the same as the debt.
What is the National Debt?
The national debt is the sum of all outstanding debt owed by the U.S. government. It includes money borrowed from other nations, federal agencies, and both private and public citizens, through investments such as treasury bonds and bills. It is comprised of both debt held by the public and by government accounts, and is not affected by fiscal terms such as surpluses, deficits or the amount of taxes collected.
The national debt is measured on a fiscal year basis, which is defined as October 1 of one year to September 30 of the next year. The national debt is typically estimated as of September 30 of each year, but is not officially calculated until the beginning of the following year.
How is the national debt calculated?
The national debt is calculated by subtracting the amount of money budgeted for repayment of the national debt from the total amount of debt the government owes. This figure is usually referred to as the Gross Domestic Product (GDP) and is reported on an annual basis. The GDP is the value of all goods and services produced by a country over a given period.
What is the Federal Budget Deficit?
The federal budget deficit is the amount by which the federal government spends more than it receives in revenue in a given fiscal year. The federal budget deficit occurs when the government spends more money than is brought in through taxes, Social Security taxes, and other sources of revenue. In this case, the government is borrowing funds from various sources such as the public, foreign nations and the Federal Reserve in order to cover the shortfall.
How is the federal budget deficit calculated?
The federal budget deficit is calculated by subtracting total revenues from total expenditures in a given fiscal year. Total revenue includes such sources as individual income taxes, corporate income taxes, Social Security taxes, and other sources of tax revenue. Total outlays include such expenditures as Medicare, Social Security, defense spending, interest on the national debt and other government spending.
What are the effects of the national debt and the federal budget deficit?
The national debt and the federal budget deficit each have their own set of effects, both negative and positive, on the overall economy.
Negative effects of the national debt:
- Increase in national interest debt service costs
- Decreased global economic stability
- Potential for higher inflation rates
- Increase in taxes to pay off the debt
Negative effects of the federal budget deficit:
- Increased borrowing costs for the federal government
- Lower savings and investment due to higher interest rates
- Compromise of government spending
- Burden on future generations
Positive effects of the national debt:
- Ability to borrow money in times of economic crisis
- Funds projects in areas such as transportation, energy, and technology
- Stimulates economic growth
Positive effects of the federal budget deficit:
- Stimulates economic activity during a recession
- Temporarily within public works projects such as bridges, highways and more
- Funds social security, healthcare and other government programs
The national debt and the federal budget deficit are two terms that often get confused. While both are an essential part of the economy, it is important to understand the difference between the two. The national debt is the total borrowing of the U.S. government over an extended period of time, while the federal budget deficit is the difference between the amount the government owes and the amount it receives in revenues for a given year. Each of these have their own implications for the economy, both in the short-term and in the long-term, and should be kept in mind when considering the current economic state.
