Deficit vs. Debt

When discussing government, or corporate finances the terms of deficit and debt get thrown around a lot. While they are closely related they are two separate concepts.

The deficit typically refers to the current financial period and relates to a shortfall in revenues when compared to expenses. In a government context, more is being paid out than is being collected in taxes. Any shortfall has to be funded somehow, so an organization will pay this deficit out of assets it already has or by incurring more debt.

The debt typically refers to the total outstanding liabilities of a government, or corporation.
Most governments are in some form of debt position, owing money to a combination of other governments and private holders of items like treasury bills or government bonds. In a government context, the debt is usually an accumulation of running a deficit for many years. If you have a shortfall every year when comparing how much you take in to how much you pay out, this consistent deficit will add to your debt every year.

Being in a debt position or incurring a deficit is not necessarily a bad thing, governments and organizations sometimes need to spend more in a current period than they have on hand. The issue comes from consistently being in a deficit position and building up your debt to the point where your interest payments become unsustainable. As the financial crisis has played out, numerous countries have needed bail outs and support because they could not even pay the interest on their debt. So as you can see above, deficit vs. debt really becomes deficit and debt as one leads to another.
By Jeffrey Glen

Copyrighted 2020. Content published with author's permission.

Posted in ...