Deficit, National Debt: What’s the Difference?

Debt ceiling, deficit, national debt, financial crisis—lately these words have been thrown around carelessly by everyone from congressional leaders to your grandmother. The current situation in the United States has everyone talking, but are they really listening (and understanding) the words they are regurgitating? “Deficit,” “national debt” and “debt ceiling,” have been reeled off so frequently that most of us listening to any conversations regarding the financial crisis tend to believe they are all interchangeable. But as it turns out, these terms actually have different meanings, however slight they might be. Let’s break it down, shall we? That way you can be the pretentious one in the crowd who scoffs at ignorant misusage and enlightens everyone to the truth.

 National Debt

            “National debt is the sum of all outstanding debt owed by the federal government.” Simple, effective, easy to understand. It’s the sum of all the owed money, including interest (I wonder what the government’s interest rate is?). A nation is considered in “national debt” when they are unable to collect enough income to cover all their expenses. I’m sure we all knew that already, but a clear definition is always helpful in these situations. Just so we’re completely transparent, the “income” our government is lacking right now comes from corporate and income taxes as well as “fees” the government charges in areas such as student loans and admissions to national parks.

 Deficit

Deficit, on the other hand, refers to “the difference, in a single year, between government receipts and spending. Those deficits become the national debt when they are added together.” Deficit spending is what you and I would associate with taking out a loan for a car or a mortgage on house. It’s often viewed as temporary but “necessary” spending. A deficit goes sour when you keep taking out loans, living above your means, charging money that you don’t have. Eventually something’s gotta give and you’re forced either to sell your assets or declare bankruptcy. Basically deficit spending is okay in moderation, but VERY bad in excess. Great Depression bad. And, this time it’s the government’s fault.

Just as an added note, national debt is still possible even if there isn’t a deficit during a specific fiscal year. The example CNBC gives is that in 2001, the government had a surplus of $127 billion for that year, but all the previous years of deficit still totaled about $5.9 trillion in debt.

 Debt Ceiling

The “debt ceiling” refers to the cap Congress places on how much debt the United States can manage. It was established in 1917 by Congress to give the government more flexibility in spending for World War I. It happened to stick. And “whenever the government is going to exceed the debt limit, Congress has to vote its approval to raise it.”

Which brings us to where we are now. And just so you all know, the debt ceiling has been raised 74 times since 1962, and 10 of those times has been since 2001.

All information gathered from CNBC