As of April 2018, the United States national debt stands at roughly $21 trillion. In fact, you can watch the debt grow in real time here. A number of think tanks and companies in Washington have concluded that the national deficit will reach $1 trillion by 2019 at the current growth rate. With so much rhetoric in the news about the debt and the deficit, it is helpful to understand what these terms mean, and their implications. With Republicans controlling the executive branch and both houses of Congress, as well as the recent passage of tax cuts, these terms have been making their way more and more into the mainstream media. These terms can get into the weeds of policy and budget, so it is important to understand where these seemingly abstract concepts originate from.
What is the deficit?
The federal deficit is the difference in real dollars between how much money the United States spends in a single year verses much revenues it takes in.
What does this mean?
The amount of money the government takes in is called “receipts”, and the money it spends are called “outlays”. Typically, during recessions or economic downturns, the government will spend more money in order to spur growth in the economy, to hopefully get the flow of money moving again. This is also usually when the deficit spikes because the government is generating less tax revenues, because wages tend to go down. For Fiscal Year 2017, the deficit stood at $665 billion, yet the debt increased by $670 billion. This is due to the government spending much more money than it took in, thus increasing the overall debt for the country. After the financial crisis in 2008, the deficit remained high, at $1 trillion or higher, yearly until FY 2013.
What is different in 2017, is that the United States is no longer in a recession or economic downturn. In fact, nearly the opposite is occurring. The economy is growing, and wages are increasing. The CBO came out and stated that the debt could potentially equal the gross domestic product (GDP) within the next decade. All of this is extremely dangerous, as the US is addressing an aging population. This can put a greater strain on Social Security and other benefits, and thus further hurting the deficit.
What is debt?
Alternatively, the debt is the cumulative amount of the money that the United States owes and has borrowed to cover the costs of the deficit from previous years.
What does this mean?
Even if the deficit were to shrink, the government would still have debt because the federal government still has to borrow money to cover its costs of operation. In many respects, the federal debt mirrors the debt of an individual or family; it covers all the costs and expenses owed collectively from purchases and compensations, including interest. You may be asking where this money comes from to cover the costs of running the government. From CNBC, “The revenues come from corporate and income taxes, and the fees the government imposes, such as for visas and passports, student loans, and admission to national parks.”
What about interest?
The last major component to consider in this entire debate, is interest. For 2017, the interest covered 6.8% of all federal outlays. This is less than in the 1990’s because of held down interest rates. Therefore, the government is spending and borrowing more, but spending less to pay off the interest on said debt. The average interest rate stands at about 2.2%. By 2025, it is estimated that the interest on the debt will reach 12.5% of the total federal budget.
What can we expect in the future?
Clearly, this problem is not going away any time soon. Both the debt and the deficit continue to grow, with very little substantive action seen on the part of the federal government to address these problems. Understanding where these figures come from, and why they continue to grow, is an important step in understanding the differences between debt and deficit, and why both numbers continue to plague both the White House and Congress.