The main difference between deficit and debt is that deficit is the amount by which expenditure exceeds revenue, whereas debt is the total amount of money owed.
Deficit and debts are two interrelated concepts. Deficits often lead to debts. This is naturally because when you spend more money than you earn, you will need to borrow money from someone. This is a concept common to individuals, companies, and governments.
Key Areas Covered
What is Deficit
The deficit is the amount by which expenditure exceeds revenue. This is the opposite of surplus. In fact, deficits can occur when an individual, company, or government spends more than they earn within a specific period of time. In a company and a government, deficits can also occur when liabilities exceed assets or imports exceed exports.
When you spend more money than you earn, you will need to borrow money from someone or sell something off. Companies and governments also face the same problem. Governments have many expenditures – payments for government workers, construction, goods and services, welfare, etc. If the money the government collects as taxes can’t cover its expenditures, the government will face a deficit and will have to borrow money. This is where debt comes into play.
There are two main types of deficits a country can face: trade deficit and budget deficit. When the government spends more in a specific year than it earns in revenues, we call it a budget deficit. A trade deficit, in contrast, occurs when the value of a country’s imports exceeds the value of its exports.
What is Debt
Debt is the amount of money owed to some party. In simple words, it is the money borrowed by one party from another. In a debt agreement, the borrowers get permission to borrow money under two main conditions: 1) the money must be paid at a later date, 2) with interest. Many individuals and corporations use debt as a method of making large purchases they could not afford under normal circumstances.
Deficits often lead to debts. As we explained in the earlier section, when you spend more than you have, you have no other option but to borrow from someone. This happens to governments, as well. When a government runs a deficit, it adds to its long-term debt. For instance, suppose the government of Sri Lanka has a 200 million budget deficit one year, so it borrows money to pay for its budget deficit. But the next year, the government runs another deficit of 100 million and borrows again. Now the government has accumulated a debt of 300 million. But just like everyone else, governments also have to pay both amount of the loan and the interest. Therefore, they will have to pay 300 million and the interest. The final payment will depend on the interest rate. If the government wants to repay the debt, first, it will have to stop running a deficit and start running surpluses.
Difference Between Deficit and Debt
Deficit is the amount by which expenditure exceeds revenue, whereas debt is the total amount of money owed.
When a government’s expenditures exceed its revenue, the government runs a budget deficit. When the government borrows money to pay for the budget deficit, this adds to its national debt.
The main difference between deficit and debt is that deficit is the amount by which expenditure exceeds revenue, whereas debt is the total amount of money owed. When a person spends more money than you earn, you run a deficit. Then that person will undoubtedly need to borrow money from someone, accumulating debts. This is the case with individuals, companies, as well as governments.