Debt vs. Deficit: What's the Difference?

Debt vs. Deficit: An Overview

Debt is any money that is owed to someone else. The term deficit refers to a situation where costs exceed income, or liabilities exceed assets. Debt can be not just the accumulation of amounts borrowed but also, years of deficits that may add to it.

Debt and deficit are two of the most common terms in all of macro-finance. They're also the most politically relevant, inspiring legislation and executive decisions that affect many people.

Although people often use these words interchangeably, they are inherently different and the magnitude of each doesn’t necessarily have anything to do with the other. But they can have plenty to do with people's situations, the health of corporations, and the well-being of an underlying economy.

Debt

Debt is money owed to another entity. As such, it is negative by definition and never positive. Entities borrow money to finance large purchases, make investments, and grow their business when they don't have enough capital themselves. Ongoing borrowing increases debt. Yet, despite debt's negative connotation, it doesn't necessarily indicate a weak economy or a company in trouble.

Individual Debt

Individuals incur debt when they borrow from banks, lenders, and other individuals to finance large purchases, such as cars and homes. Types of consumer debt include credit cards, loans, and mortgages. Without these ways to borrow/types of debt, people wouldn't be able to afford basic necessities like housing.

Institutional and Government Debt

Companies and countries incur debt by borrowing from investors when they issue corporate and government bonds. Bonds are obligations that need to be paid back to bondholders by a specific date. That so-called maturity date is usually fixed.

The maturities of government debt depend on whether the government security is in the form of:

• Treasury bills (maturities of one year or less)
• Treasury notes (maturities of two, three, five, seven, and 10 years)
• Treasury bonds (maturities of 20 years and 30 years)

The U.S. government’s national debt was more than $34.63 trillion as of April 1, 2024. The government's full faith and credit are so strong that its T-bills, T-notes, and other debt obligations are attractive enough to entice investors over and over again.

Deficit

A deficit is simply the opposite of a surplus. To calculate a deficit, subtract total expenditures from total revenue, or total liabilities from total assets for a specific period of time. If expenditures (or liabilities) are greater than revenue (or assets), your result is a deficit.

Anyone can run a deficit, whether an individual, household, corporation, or government. When a private company runs a deficit, it is normally called a loss (a surplus is called a profit).

A Deficit Can Build Debt

Running a deficit can increase the level of debt an entity has if spending continues to outpace revenue. That's why people believe that deficits are unsustainable over time.

For instance, a consumer runs a deficit if they spend $150 but only receive $100 to cover all their expenses. They'll continue to run a deficit if their income or assets don't increase, but their spending or liabilities do. Therefore, each month of deficits can add to the debt a person owes and make it harder to pay off.

Corporations and governments also increase their deficits by spending more than they make. As such, running a deficit eats away at any surplus balance they have.

Deficits come with a negative connotation, but they aren't necessarily a bad thing. For instance, governments try to boost economic growth when they increase their spending and, as a result, increase their deficit.

Types of Deficits

There are several different types of deficits. The main ones include:

• Budget Deficits: These occur when expenses exceed revenue. Budget deficits are generally used to describe the health and well-being of a country. Governments normally run a budget deficit when the amount they spend (on social programs and other obligations) exceeds the amount of tax revenue they collect. The projected deficit for the U.S. in 2024 is $1.85 trillion.
• Trade Deficits: These deficits occur when the value of a country's exports is less than the value of its imports. Trade deficits are also called negative balances of trade.
• Revenue Deficits: These deficits occur when actual net income is less than projected net income and revenue received isn't sufficient to cover spending or costs incurred.
  

Key Differences

We've highlighted the major differences between debt and deficit. Here are some other key factors that set them apart.

Repayment

Deficits don't involve principal and interest payments because there is no external party to whom money is owed. Rather, there's an imbalance between spending and income.

However, debt involves the need to repay principal and interest. For instance, when you take out a loan to purchase a car, the lender charges interest on top of the principal balance. This is known as the cost of borrowing. You pay this additional charge until the loan is paid off in full.

Similarly, corporations and governments pay investors interest at regular intervals when they purchase bonds. Once the maturity date is reached, the debt issuer also pays the principal balance back to the investor.

Sources

Another key difference is the source of the debt and deficit. With debt, a borrower has to go to a lender to borrow money. So, that debtor ends up owing money to a bank, another financial institution, another country, or another individual.

Deficits, on the other hand, don't involve borrowing or other parties to a transaction. They simply reflect the mismatch of revenue and spending. As such, households, companies, and governments run deficits on their own.

Consistency

An amount of debt can change over time, either as you systematically pay it down (or repeatedly add to it). Interest also factors into the amount of money owed to someone else.

This principle doesn't apply to deficits, which can remain the same if individuals, households, or governments take careful steps with the amount of money that they spend on an annual basis.

National Debt and the Budget Deficit

Governments issue bonds when they borrow money and must pay back the money they receive plus interest at a later date. When investors purchase government bonds, they become the lenders or creditors. The money raised through bond sales can be used for purposes like infrastructure, military readiness, and welfare benefit spending.

A government budget deficit occurs when the government spends more money than it receives as revenue. This means that government expenditures exceed inflows from taxes and other revenues, such as fines, duties, and fees.

While different, the debt and budget deficit can be related. For example, if a government spends more than it receives, it may be forced to raise additional money via borrowing so it can cover all of its obligations, including interest payments on prior debts.

An alternative to borrowing is to raise taxes to generate more income. However, tax hikes are almost universally despised by voters, and can be politically harmful. So politicians often prefer borrowing.

If budget deficits widen and debt balloons, it can cause economic instability. Ultimately, that can lead to a recession and the devaluation of the currency as people lose confidence in the government's ability to handle its finances and continue repaying ongoing obligations.

The Bottom Line

Debt is any amount of money owed by one party to another. A deficit is an imbalance of income and spending, where more is spent by a person or institution than is received by them.

If allowed to occur on an ongoing basis without making up shortfalls, deficits can increase the size of the debt that is already owed to larger and larger amounts. This can make paying off the debt increasingly difficult.