Understanding The Difference In Deficit and Debt

I had someone ask me the other day "Sheepdog, what's the difference between debt and deficit?" When I asked him what he thought it was, he replyed "I think they are just a different term used for the same thing." That told me there are people, which some are educated folk, that needs to understand the difference.

We all have heard someone with the government say something like “this budget will reduce the deficit by 25%”. That sounds pretty good when we hear something like that, but it may not mean what you are thinking.
Let’s start by learning about DEFICIT. If our government has a budget of $3 trillion but we only have revenues of $2 trillion than we have a deficit of $1 trillion. Our government would then need to borrow from itself (other programs), the people, The Federal Reserve or foreign governments for that additional $1 trillion we are spending. The federal budget deficit for 2009 was a record-breaking $1.42 trillion and estimates suggest that 2010’s budget deficit will be $1.6 trillion.
Now the national DEBT on the other hand is what our government owes. Every year the government borrows money it adds to our national debt. The difference between the deficit and the debt is important. When you hear politicians talk about reducing the deficit, what this really means is that our debt isn’t growing as fast as it was. It does not mean we’re getting out of debt or reducing the current debt.
To put it more in terms we can understand, let us assume that a family has an income of $70,000 per year. Their budget though is $90,000 per year (yep, living a little high on the hog). This would mean that there is a deficit of $20,000. Now to stay afloat the family will need to borrow this $20,000 from someone, possibly a bank, a home equity loan, credit cards, etc which now becomes a debt. Now the following year this family’s income remains the same, but they were able to lower their overhead to $80,000 so this year they only have a deficit of $10,000. This family could say that they lowered their deficit by 50% or halved it. This really sounds good, but the real truth is that their debt went up by $10,000, so now it totals $30,000.
As long as there is a deficit, the debt keeps climbing. If we are able to keep the deficit this year to only $1.6 trillion, we have increased the debt, just in two years by $3 trillion! Oh, what a relief.
Here is a 2-3 minute YouTube video that helps to see how fast our National debt is traveling.



I hope this helps explain debt vs. deficit. Listen carefully to anyone talking about money and remember that just because they say that the deficit is being reduced does not mean that the debt is being reduced.

Now, here are some numbers just released from our government that should make any American a little I mean a lot upset. Last month (Feb. 2010) we took in $107 billion but spent $328 billion. Okay, we just learned about debt and deficit. Can you figure out what was the deficit and what was the new debt? If you said the deficit was $221 billion you win. This last month our government posted a record $221 billion budget deficit.