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Nov 26

How to know the difference between debt and deficit

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Looking up the definitions of both debt and deficit can amount to nothing to your understanding. Both of these terms can be hard to understand for a newbie, but also, these terms are the most common under micro-finance. Even then, these terms are also relevant to other things such as a company’s expenditure or a nation’s expenditure, both of which are visible in the recent US debt Stats.

A simple concept of the two terms is accumulated deficit can lead to debt or an organization’s difference between spending and borrowing can lead to debt, given if the expenditure is higher than the amount the organization borrows; debt vs. deficit.

 

What is Debt?

Simply put, debt is the money you owe to other people. If a company or a nation wants to spend on something expensive, they need to incur some liability to other organizations, since it can be not included in their total spending; thus the borrowing of money. It is important to remember that by definition, debt is negative and can never be positive. It does not necessarily mean that when an organization or a country has substantial debt, they have a weak economy.

Bear in mind though that excessive national debt can incur some heavy toll on its economy. If a country incurred massive debt, it chooses between three options on how to deal with the problem.

A country can:

  • Cut its spending and sell assets to fund the deficit,
  • It can print more money to a considerable amount,
  • and it can default on loans.

However, printing excessive money can be problematic since it could lead to high-level inflation.

 

Government Borrowing

Government borrowing can also be in other forms. A nation could borrow a specific monetary value from a world-level organization such as the World Bank or other private financial institutions. Money borrowed from different countries and organizations is called the national debt, which can also be called federal debt, government debt, and more.

There is a limitation to how much money a nation can borrow, however. It is authorized by the Congress of a particular society. The money that a country borrows without the authorization of the Congress is called total public debt subject to limitation. Any amount that the said country will borrow that exceeds the limit set by the Congress has to be reviewed and authorized by the legislative branch.

 

What is Deficit?

Fiscal deficit happens when a country spends monetary value more than it makes yearly. This imbalance is typical among the nations of the world. How it affects the economy significantly differs on how a specific country handles its current expenditure and trades.

Deficit is by definition, the polar opposite of surplus. For example, let’s say a certain country exports goods worth 100 billion dollars, while their imports exceed their export; let us assume the import is 200 billion dollars. The lacking 100 billion dollars in their trading will be their deficit. If taken account into their yearly accumulated deficit, it will be their annual debt. It can be avoided, though, by enforcing more significant taxes on the citizens. However, putting up too much tax can lead the people to revolt against the government.

Take note that too much deficit can incur debts and could very well lead to bankruptcy. A more straightforward example of this is how a company see these terms, the deficit is the loss, and the surplus is the profit.

With that said, deficits need to be financed as soon as possible. The government does it by selling government securities like treasury bonds. Small companies, businesses in any industry and even individuals can borrow these bonds, of course with a promise of future payment. Lending these bonds directly affects the available money that a country can lend. A clear example of this is how a certain individual can borrow money from the government cannot use the same money to buy stock from a private company. This results in how deficits from all industries can greatly affect a nation’s economy.

Deficit is largely seen as something negative. While some economic organizations  see debt as something necessary for economic growth, other people argue that it can lead to massive interests and will make the future generations suffer to provide for the current beneficiaries. If this happens, the country might incur substantial losses on deficit and might likely cap on this matter entirely.

 

Takeaway

These two terms are not at all in contrast, since these two terms are connected in an economic sense as both small and big organizations deal with these terms. Deficit can affect the debt incurred and vice versa. They are both common in all subjects of economy as they are both fundamental terms in this field. Understanding the difference and their connection to each other is essential to understanding basic economics.

 

Author Bio:

Tiffany Wagner is a content marketer, specializing in financial, technology, and health topics. When not working, she loves doing outdoor activities with her family and friends.

 

 

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