In times of economic difficulty, you’ll often hear about the level of government debt and deficit referred to more frequently. On paper, it is easy to assume they both mean one and the same. Here, we look at the differences.
Starting with debt
OK, so this one is pretty simple. It’s what it says on the tin – it refers to the amount of money that a government owes. It owes this money to the private sector and buyers of bonds or gilts. The debt figure refers to the cumulative amount of debt that a government piles up over the years.
However, it’s important to note that debt by its definition sounds bad. However, in reality governments like companies will have some level of debt to run efficiently.
Even ourselves, we may utilie the option of a cheap loan to fund a big purchase – but that doesn’t mean we are struggling.
Moving onto the defecit
This refers to the difference between the amount a government spends and the money it receives. This is much like the profit of a company and attributed to a specific period rather than a running tally. If a government spends more than it receives, then a deficit is create and this is usually always the case with the biggest economies in the world.
If a government spends less than it receives, then a budget surplus is created.
Now there is a clear link between the debt and deficit of a government. If a government is spending more than it receives, then it is increasing its spending ability through debt – so debt and the cumulative amount a government owes will naturally increase.
This is why in almost all cases the debt will be larger than the deficit because the latter is contributing to debt.