Deficit vs. Debt

We talk a lot about our federal deficit and our national debt, and it’s important to understand the difference between the two words.

The deficit is the difference between how much the federal government spends and how much it collects in one year. If the government “earns” $2 trillion in taxes in one year, but spends $3 trillion, that’s a deficit of $1 trillion. In order to pay for the difference, the government has to borrow money from itself, American citizens, foreign countries, and other sources.

The federal budget deficit for 2009 was a record-breaking $1.4 trillion and $1.3 trillion in  2010.

The national debt, on the other hand, is the total amount we owe. Every year that we borrow more money, the debt grows larger.

The difference between the deficit and the debt is especially important because when politicians talk about reducing the deficit, all that really means is that our debt isn’t growing as fast. It does not mean we’re getting out of debt.

In more personal terms: If you have an income of $50,000 per year, and you spend $60,000, that’s a deficit of $10,000. You would need to borrow that $10,000 from someone, maybe with a credit card or a home equity loan. If you reduce your spending the following year, to $55,000, you have “halved the deficit”, but you’re still spending $5,000 more than you’re earning, and going further and further into debt. After two years, despite halving your “deficit spending,” you’re $15,000 in debt .