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Difference Between Debt and Deficit

debtDebt vs Deficit

Most of the time people use the terms “debt” and “deficit” for the same purpose. Deficit occurs when spending exceeds income. Public deficit and debts are related to government receipts and outlays. The receipts are currency the Government takes in and outlays are currency the Government spends every year. The difference between the receipts and outlays leads to deficit. The receipts can be gained via excise, and social insurance and income taxes, and outlaws could include anything from medical research to construction.

When a deficit occurs in a government, the treasury department has to borrow money to pay the balance. In personal life, it is like having a credit card. Whatever you overspend accumulates on your account. On the other hand debt is the sum of all deficits. The deficit of each year is added to the current deficit.

Here is a simple example for you. For instance, if someone’s total monthly income is $3000. But he/she exceeds the limit by spending $3200 per month. Therefore the monthly deficit will be $200.

Monthly income $3000 – monthly spending, $3200 = $200 monthly deficit

After a year passes, all the deficits sum up and runs into $2400.

Monthly deficit $200 X 12 months = yearly debt $2400

This $2400 will be counted as the new debt.

Therefore, debt is the consequence of a deficit.

There are two parts of a deficit, structural and cyclical. The structural deficit exists throughout the business cycle. The high prevailing tax levels contribute to it. When the cycle is in low point, the employment rate is low and much more spending takes place. This means that the government has to borrow more money. For this reason, taxes and Vats are increased. This extra borrowing at the low point of cycle is called the cyclic deficit.

Debts always occur, but deficits may not be as uncontrollable since the economical situations changes every month or year. Theoretically, it is possible to have no deficits in a month, but if there are deficits in the other months or years, then they will eventually accumulate and become a debt.

Deficits may be theoretically constant, but debts cannot be constant. By maintaining careful and pre-planned expenses, these deficit can be made constant every month.

Summary:

1. Debt is an accumulation of deficit.
2. Deficit can be constant, but debt cannot be constant when there is a deficit.
3. Therefore debt is the consequence of a deficit.


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