What's the difference between deficit and debt?


August 24, 2010|By Nicole Radzievich, OF THE MORNING CALL

Q: As the economy teetered, Congress passed some large-scale stimulus and bailout initiatives aimed at keeping and growing jobs to fend off a deeper recession. But critics say those initiatives have exacerbated the federal deficit and grown the federal debt to unhealthy levels. Now, with the mid-term election approaching, federal campaigns are talking a lot about record deficits and whether the federal debt is sustainable. But, what exactly is the difference between deficits and debts?

A: Deficits occur when a country spends more money — outlays — than it brings in through taxes, fees and other enterprises — receipts. Surpluses happen when a country collects more than it spends.

The federal government hasn't run a surplus since 2001, when it had a $128 million surplus. There was a $236.4 million surplus in 2000, but after two wars and the worst recession since the Great Depression, that turned into a deficit of $1.4 billion in 2009, according to the Office of Management and Budget.

Perhaps a better way to look at the deficit is to compare it to the size of the economy, which can contract and expand over time.

In 2000, the federal surplus was 2.4 percent of the $9.8 trillion gross domestic product, and in 2009, the deficit was 9.9 percent of the $14.2 trillion GDP. That's a large deficit, but not the largest in the last century. In the midst of World War II, the country had the highest deficit, as a percentage of GDP, in 1943 at 30.3 percent, according to the Office of Budget Management.

Governments pay for those deficits by borrowing money or taking on "debt." Some of the money used to cover the debt comes from savings bonds in which the public might invest. Other funding sources are T-bills, notes and other securities. The government also borrows from itself, using interdepartmental funds.

The federal debt grew from $5.6 trillion in July 31, 2000, to $13.2 trillion July 31, 2010, according to the Treasury Department.

The short-hand explanation, according to the U.S. Department of Treasury, is that debt is the accumulation of deficits.

— Nicole Radzievich, The Morning Call


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