National Debt vs Budget Deficit
National debt and budget deficit are both unfavorable to a country’s economy in that they both represent a situation in which the country’s government has experienced a large outflow of funds surpassing income. The two are related to each other in that a budget deficit usually leads to a national debt where the government borrows funds to make up for the excess outflow. These terms are usually very easily confused since they are very similar in nature. The following article provides a clear overview of each concept and provides examples that clearly distinguish the two.
What does National Debt mean?
National debt, in simple, is the amount of money a country’s government borrows to cover up its expenses. National debt is usually obtained by issuing treasury bills, notes and bonds which are sold to the general public. Large national debt held by a government can be quite dangerous, because national debt tends to keep adding on every year and may come to a point at which it becomes too large to contain. Further to this, excessive national debt may also cause a country to default on its debt repayments which may potentially downgrade the country’s debt rating and thereby make it even harder to borrow funds.
What is Budget Deficit?
Budget deficit is the difference between the government expenditure and income. Budget deficits may occur when a country’s government has expenditure that surpasses their income for the period of a year. Budget deficits are usually not favorable to the country’s economy because this means that the government will have to borrow funds to cover up the deficit. A country, which has a large budget deficit, must also find a way to reduce their expenses or increase their income, which is via government taxation.
National Debt vs Budget Deficit
Budget deficit can lead to a national debt. Let’s take a very simple example. In a household, income in a year is $60,000. The expenses of the household, however, surpass the income and are $65,000. The household has a deficit of $5000, which is borrowed from another source. Assuming that, in the next year, the household has income of $70,000 and expenses of $76,000, the deficit would be $6000 but the debt for the two years would be a total figure, which is $5000 deficit in the 1st year, and $6000 deficit in the 2nd year, adding up to a total debt of $11,000.
The example clearly shows that national deficit is the shortfall between the national income and expenses during one year, and the national debt is the accumulated deficit over a number of years.
Summary
• National debt and budget deficit are both unfavorable to a country’s economy in that they both represent a situation in which the country’s government has experienced a large outflow of funds surpassing income.
• National debt is simple is the amount of money a country’s government borrows to cover up its expenses.
• Budget deficits may occur when a country’s government has expenditure that surpasses their income for the period of a year.
National deficit is the shortfall between the national income and expenses during one year, and the national debt is the accumulated deficit over a number of years.