Deficit vs. Debt

iStock_000007480400XSmall (business collapse)

With the national debt currently at $14.9 trillion, we hear a lot of talk about reducing our national deficit.  My teen posed a question while watching a recent debate as to what the difference was between debt and deficit.  “That is an excellent question my son,” said I, knowing that many politicians bank on most people not knowing the answer or are not paying close enough attention to how politicians spin it.

So, let’s put it into terms of a household.  Let’s say our income is $5000 a month after taxes.  Now we subtract all of our household and living expenses such as mortgage, insurance, utilities, food, etc.  If we spend less than our income we have a surplus.  Yea!!!  On the other hand, if we spend more than our income, we have a deficit.  Boo!!!  If we have a deficit, we must borrow money in order to cover the difference, which is called debt.  We have to pay interest on this debt until it is paid back in full.

If a deficit happens every month, we are living beyond our means and are forced to borrow more money and incur more interest on the ever growing debt.  If we do nothing to change our habits, then over time, the interest on the debt becomes larger than any other item within our family budget.  Further, if no one is willing to loan us money to cover the interest payments, we face the possibility of bankruptcy.  Not a pretty picture is it?

Now that we understand debt vs. deficit at a family level, let’s return to my son’s original question about our national debt at $14.9 trillion.  The government is no different than a household. The government has income it receives through taxes and fees.  Expenses are subtracted and the government either has a surplus or a deficit.  What do you think the government usually has?  If you answered deficit you are correct!  Believe it or not, the U.S. government has run a deficit in all but 5 years since 1969[i].  Not fiscally sound practices by any household standards.

Each year the interest on this growing debt gets larger and larger cutting into the government’s budget.  So when you hear politicians spouting about how they are going to reduce the deficit, this is just a meaningless sound bite hoping to confuse the voter.  Because, as we just learned, any deficit greater than zero requires us to continue borrowing and therefore does not reduce our debt.

By the way, your personal share of this national debt currently stands at over $47,000.  That’s $47,000 that you, your spouse, and each of your kids will have to pay to our government in order to help them pay off the debt they have incurred on our behalf.

Here’s an interesting video entitled “Brother, Can You Spare A Trillion?: Government Gone Wild!” to help put this $14.9 trillion national debt into perspective.


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