Debt vs Deficit
The federal debt is the total amount of money that the U.S. Government owes, and is a total of all of the deficits on a year-to-year basis. The deficit is simply the difference between what the government spends and receives on an annual basis. For example, if the U.S. Government spends $4 trillion in a fiscal year but only receives $3 trillion in revenue, the deficit for that year would be $1 trillion. Thus, the total government debt would be increased by $1 trillion.
Recent Context of Government Budgets and Debt
The debt balance for the U.S. Government currently stands around $21 trillion, while the 2018 fiscal year deficit is around $833 billion. From 2008 through 2016, government debt ballooned from about $10 trillion to almost $20 trillion and the 2008 Financial Crisis played a large role in this increase. With the U.S. economy in distress after 2008, the government spent the next several years stimulating the economy to get it back on track. This economic stimulus required much more spending and investment from the government than it was receiving in revenue.
According to the Peter G. Peterson Foundation, the U.S. Government has run a deficit in every year except for four (1998-2001). This is evidence that government spending is not as much of a Republican vs. Democrat issue as the media often makes it out to be.
Consumer Debt vs. Government Debt
Many people like to equate government deficit spending to using a credit card. While the government is using borrowed money similar to a credit card, this comparison does not hold up very well when you dive a little deeper. As mentioned earlier, government spending tends to spur economic growth during periods when the economy is not robust. In theory, a stronger economy means more people and businesses making more money, which in turn means more tax revenue for the government. Taking on personal credit card debt rarely produces more income for the individual spender.
Ultimately, both personal credit card debt and government debt must be re-paid to maintain healthy finances. To reduce debt, consumers and governments will generally employ some combination of increasing income/revenue and reducing expenses. When a consumer with outstanding debt passes away, their assets are liquidated to pay off their creditors. This results in fewer assets being passed down to heirs. Unlike humans, Governments exist into perpetuity. When the U.S. Government plans to spend more than what they receive in tax revenues, they issue new debt in the form of U.S. Treasury Securities. Governments, pension funds, mutual funds, and citizens rely on these securities as a substantial part of their investment portfolios. Yet, similar to credit cards, these Treasury Securities eventually need to be paid.
U.S. consumers should be conscious of their spending habits to make sure they are not over-leveraged. While the U.S. Government plays by different rules when it comes to deficit spending and debt, ultimately, the general goal remains reducing debt while stimulating the economy.
