US & World Economies US Economy Fiscal Policy The Difference Between the Deficit and the Debt By Kimberly Amadeo Kimberly Amadeo Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. learn about our editorial policies Updated on December 31, 2021 Reviewed by Erika Rasure Reviewed by Erika Rasure Erika Rasure, is the Founder of Crypto Goddess, the first learning community curated for women to learn how to invest their money—and themselves—in crypto, blockchain, and the future of finance and digital assets. She is a financial therapist and is globally-recognized as a leading personal finance and cryptocurrency subject matter expert and educator. learn about our financial review board Share Tweet Pin Email Photo: Image Source/Getty Images A budget deficit occurs when a country, business, or an individual has spending that is greater than the revenue they receive over a specific period—usually measured as a year. When spending exceeds revenue—or income—it's called deficit spending. On a government-level, the national debt is the accumulation of each year's deficit. For a business or individual, this would be their total debt. When the revenue exceeds the spending, it creates a budget surplus. A surplus will reduce debt. How the Deficit Affects the Debt The U.S. Treasury must sell Treasury bonds, bills, and notes to raise the money to cover the deficit and fund regular government operations. This type of financing is known as public debt since these bonds are sold to the general public. Treasury debt is considered one of the most secure investments in the world because these debt securities have the backing of the U.S. government. In addition to the public debt, the government regularly loans money to itself. This intragovernmental debt is in the form of Government Account Series securities. Most of these funds come from the Social Security Trust Fund. That happened in the past when payroll taxes provided more than enough income to cover all Social Security benefits and the pot of funds grew. That's because there were more seniors working than there were retirees pulling benefits. However, as the number of seniors retiree grow, there need to be enough younger workers paying the taxes needed to cover senior benefits. When there is a greater demand for outgoing funds for retirees then an inflow of funds from worker's taxes, the Social Security payments will add to the deficit and the debt. To avoid this, one of three things must happen. Payroll taxes must be raisedBenefits must be loweredOther programs must be cut Legislators continue to debate the best solution. How the National Debt Affects the Deficit The national debt will affect the budget deficit in three primary ways. First, the debt gives a better indication of the true deficit each year. You can more accurately gauge the deficit by comparing each year's debt to the previous year's debt. That's because the deficit, as reported in each year's federal budget, does not include all of the amount owed to the Social Security Trust Fund borrowed during the use of intragovernmental funding through the issuing of Government Account Series securities. That amount owed is called off-budget. Second, the interest due on the Treasury bonds, notes, and bills and other government borrowing adds to the deficit each year. About 1.7% of GDP goes toward debt interest payments. Interest on the debt hit a record in FY 2019, reaching $575 billion. That beat its previous record of $523 billion in FY 2018. In the FY 2013 budget, the interest payment dropped to $416 billion. Third, the debt decreases tax revenues in the long run, which further increases the deficit. As the debt continues to grow, creditors become concerned about how the U.S. government will repay any funds it owes. Over time, creditors may claim the deficit increases their risk if they buy Treasury debt products. They may demand higher interest rates to offset any perceived increased risks. Raising those rates may dampen economic growth. For perspective, the U.S. national debt exceeded $22 trillion on Feb. 11, 2019. That's more than triple the nearly $6 trillion debt in 2000. As of December 2021, U.S. national debt exceeded $29 trillion. How Debts and Deficit Spending Affect the Economy Initially, deficit spending and the resultant debt will boost economic growth, especially if the country is in a recession. Deficit spending increases the amount of money in the economy. Whether the money goes to jet fighters, bridges, or education, it ramps up production and creates jobs. In the long run, debt can damage the economy because of higher interest rates. Note Not every dollar creates the same number of jobs. For example, military spending created 8,555 jobs for every $1 billion spent in 2005. That's less than half the jobs created by $1 billion spent on mass transit. For that reason, the military is not the best unemployment solution. Other issues occur if the U.S. government lets the value of the dollar fall. One effect is that the debt repayment will be in cheaper dollars. As this happens, foreign governments and investors become less willing to buy Treasury bonds, which forces interest rates even higher. Presidential Impact on the Deficit and Debt The president can reduce the deficit by spending only the collected revenue instead of issuing new Treasury debts. As a result, looking at debt by president provides a better gauge of government spending than deficit by the president. For example, President Barack Obama added $8.6 trillion to the debt and his total budget deficits totaled $8.9 trillion.Similarly, President George W. Bush's stated budget deficits totaled about $2 trillion. But he added about $5 trillion to the debt. Having said that, the presidents with the highest deficits are still the presidents who contributed the most to the debt. Note The record high deficit was $1.4 trillion reached in FY 2009. Both Bush and Obama created it to fight the 2008 financial crisis. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The Library of Economics and Liberty. "Government Budget Deficits and Government Debt." U.S. Government Accountability Office. "Federal Debt." Federation of American Scientists. "Social Security: The Trust Funds," Pages 1-4. Federal Reserve Bank of St. Louis. "Can Social Security Survive the Baby Boomers?" Govinfo. "Fiscal Year 2016: Historical Tables: Budget of the U.S. Government," Page 2. Congressional Budget Office. "The Budget and Economic Outlook: 2020 to 2030." TreasuryDirect. "Interest Expense on the Debt Outstanding." BC Open Textbooks. "Principles of Economics: 28.4 Monetary Policy and Economic Outcomes." TreasuryDirect. "The Debt to the Penny and Who Holds It." Treasury.gov. "Fiscal Data." Peter G. Peterson Foundation. "The Risks of Running up Deficits When the Economy Is Good." University of Massachusetts Amherst. "The U.S. Employment Effects of Military and Domestic Spending Priorities," Page 6. Federal Reserve Bank of St. Louis. "The Name Is Bond—Indexed Bond." Manhattan Institute. "Obama’s Fiscal Legacy: A Comprehensive Overview of Spending, Taxes, and Deficits." TreasuryDirect. "Historical Debt Outstanding - Annual 2000 - 2019." Congressional Budget Office. "Federal Budget Deficit Totals $1.4 Trillion in Fiscal Year 2009."