Current Event 6 - Policy Basics: Deficits, Debt, and Interest
Principles of Macroeconomics
Policy Basics: Deficits, Debt, and Interest
“When the government runs a deficit, it increases the national debt; when the government runs a surplus, it shrinks the debt.” This article discusses three important budget concepts – deficits (or surpluses), debt, and interest (www.cbpp.org., 2013).
Deficit (or Surpluses)
For any given year, the federal budget deficit is the amount of money the federal government spends minus the amount of money it takes in, which is revenue. If the government takes in more money than it spends in a given year, the result is a surplus rather than a deficit.
A deficit is an excess of expenses over income in a given time period. When the economy is weak, people’s incomes decline, so the government collects less in tax revenues and spends more for safety-net programs such as unemployment insurance (Krugman, P., 2012). This is one reason why the deficit typically grows or a surplus shrinks during recessions. Conversely, when the economy is strong, the deficit tends to shrink or a surplus grows. Which would make sense because in a weak economy people and making and spending less money so less money is taxed.
Unlike the deficit, which drives the amount of money the government has to borrow in any single year, the national debt is the cumulative amount of money the government has had to borrow throughout our nation’s history. When the government runs a deficit, it increases the national debt; when the government runs a surplus, it shrinks the debt. This article mentions two kinds of debt, debt held by the public and gross debt. The debt held by the public (sometimes called net debt) measures the government’s borrowing from the private sector, including banks, investors and foreign governments. The second debt mentioned is gross debt which is held by the public plus the securities the...