The Relationship Between Deficit & Debt

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Deficit and debt are two terms that are often used interchangeably that really shouldn't be. Learn about the relationship between deficit and debt with help from a licensed insurance agent in this free video clip.

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Video Transcript

Hello, I'm Jonathan DeYoe with DeYoe Wealth Management in Berkley, California, and today we're talking about the difference between the national debt and a deficit. It seems that these terms are often used interchangeably but they shouldn't be. They both mean completely different things. The deficit is what happens when the government spends more money than it takes in. The reverse side of that would be a surplus when the government takes in more money than it spends. In 2011, the US government spent 3.6 trillion dollars and took in 2.3 trillion dollars in revenue which left us with a deficit in 2011 of 1.3 trillion. So that's 2011, the national debt is the sum total of all the deficits we've ever run, minus some of the surpluses we ran in those Clinton years and prior years that we've all forgotten about because we usually run deficits. So right now the total national debt which includes all those deficits, is about 16 trillion dollars and this is a number that should cause us concern. At the same time, these numbers are only important in context. Usually when we look at the national debt and the deficit, we look at them in terms of percentage of GDP. In 2011, our deficit as a percentage of GDP, ran right about 7 percent. Now I would like to think that we would start running surpluses and we start paying down our debt. This seems unlikely. So the best scenario and it seems like historically we do well when we keep our deficits to 3 percent or just under of GDP. There's been substantial recent work done on the damage that a high national debt does in terms of our future growth potential. The threshold seems to be about 100 percent of debt to GDP and we start using our future growth potential which means fewer future jobs, fewer business starts. So this is something we're going to pay attention to a lot and my assumption is in the next six months we're having a pretty massive political campaign and this will get a lot of attention. I'm Jonathan DeYoe with DeYoe Wealth Management. Thanks for listening.


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