Health & Fitness
What's the Difference Between America's Deficit & Its Debt?
The terms deficit, debt, and debt ceiling are likely to be bandied about by politicians and the media frequently in coming months. It's important for all Americans to understand these terms.
What’s the difference between America’s deficit and its debt, and how do they relate to the debt ceiling? The terms deficit, debt, and debt ceiling are likely to be bandied about by politicians and the media frequently in coming months. It’s important for all Americans to understand these terms.
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The deficit
America’s deficit is its annual budget shortfall. Any year the government’s spending exceeds its revenue (the amount of money taken in through taxes and other means), it has a deficit. When the government spends less than it takes in, it is called a surplus. Deficits are controversial and have been for many years.
Keynesian economics states deficits can be used to stimulate economies and help
countries rise out of recession. Other experts argue governments should not incur deficits because the money paid in interest could be better spent elsewhere.
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The debt
The national debt is the full amount the American government owes – all of its
deficits and surpluses added together. If the government runs at a deficit of
$10 million for five years, then its debt will be $50 million. Every year that a country runs at a deficit, its debt increases.
The debt ceiling
When a government runs at a deficit, it must borrow money to keep operating. The U.S. government generally borrows by selling securities such as Treasury bills, notes, bonds, and savings bonds. The amount it can borrow this way is limited by the debt ceiling, which was established under the Second Liberty Bond Act of 1917.
The United States hit its current debt ceiling, which is about $16.4 trillion, on December 31, 2012. Before it can issue additional debt, Congress will need to raise the debt ceiling. This may make the debt ceiling a popular topic in political conversation during the next few months!
Weekly Focus – Think About It
Compromise: n. Such an adjustment of conflicting interests as gives each adversary the satisfaction of thinking he has got what he ought not to have, and is deprived of nothing except what was justly his due.
--Ambrose Bierce, American journalist
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James T. Parks, CFP®, AEP, AIF
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