Journalists and even politicians who should know better, often use the terms "debt" and "deficit" interchangeably when discussing a budget or countries finances. They have very different meanings but it's really quite simple...
If you earn 100 coins per year but your expenses are 120 coins per year then each year you must borrow 20 coins to be able to live. Those 20 coins are your DEFICIT, or shortfall.
As a country your INCOME will mainly be from tax, and your expenses cover everything from military spending to social programs to politician's wages.
Each year that you are borrowing those 20 coins you are increasing your total debt.
After year 1 your debt will be 20 coins.
After year 2 your debt will be 40 coins.
After year 3 your debt will be 60 coins.
This is the total amount you have borrowed and owe. This is your DEBT.
In reality interest is added to money that you owe, so it actually will increase by more than 20 coins each year.
When times are good you might have an increase in income or a reduction in expenses.
When you have more income than your expenses, this is a SURPLUS. A surplus can be saved for the future, or this extra money can be used to pay off some of your debt.
For example, if you have a debt of 80 coins, and this year have a surplus of 30 coins, you can reduce the debt to 50 coins. The advantage of this is that next year you will pay less interest on the debt.
Imagine a country that has a debt of 10 Billion coins, and is currently running at a deficit of 2.5 Billion coins per year.
A new Government takes over the country and changes the financial and tax policy to increase income and reduce spending. Because of spending commitments, these changes take place over several years rather than instantly.
After 4 years the deficit is down to half a billion coins per year. But during these past 4 years, while the deficit has reduced, it has continued to add to the debt.
This might look like:
| Year | Deficit | Debt at year end |
|---|---|---|
| 0 | 2.5 Billion | 10 Billion |
| 1 | 2 Billion | 12 Billion |
| 2 | 1.5 Billion | 13.5 Billion |
| 3 | 1 Billion | 14.5 Billion |
| 4 | 0.5 Billion | 15 Billion |
Opposition politicians can point to this and say "Look they increased our debt by 50%! They are terrible with the economy!" even though the government's policies may have reduced spending relative to income.
This content is provided for information only. Remember, global finance is a more complicated topic than you'll get from a one page website.
Please share and help educate journalists, politicians and the public about the differences between debt and deficit!
© 2017