National Debt or Federal Deficit? What's the Difference?

Debate Over Unemployment Benefits Exposes Rift on Borrowing

U.S. Awaits Result Of Debt Ceiling Vote
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The federal deficit and the national debt are both bad and getting worse, but what are they and how are they different?

The debate over whether the federal government should borrow money to extend unemployment benefits beyond the typical 26 weeks at a time when the number of jobless is high and public debt is growing rapidly shed light on terms that are easily confused among the public - the federal deficit and national debt.

For example, U.S. Rep. Paul Ryan, a Republican from Wisconsin, said the policies put forth buy the White House including the jobless benefits extension in 2010 represent a "job-killing economic agenda - focused on more borrowing, spending, and taxing - [that] will keep the unemployment rate high for years to come."

"The American people are fed up with Washington's push to spend money we don't have, add to our crushing burden of debt, and evade accountability for the dismal results," Ryan said in a statement.

The terms "national debt" and "federal deficit" are widely used by our politicians. But the two are not interchangeable.

Here's a quick explanation of each.

What is the Federal Deficit?

The deficit is the difference between the money federal government takes in, called receipts, and what it spends, called outlays, each year.

The federal government generates revenue through income, excise and social insurance taxes as well as fees, according to the U.S. Department of Treasury's Bureau of the Public Debt.

The spending includes Social Security and Medicare benefits along with all other outlays such as medical research and interest payments on the debt.

When the amount of spending exceeds the level of income, there is a deficit and the Treasury must borrow the money needed for the government to pay its bills.

Think of it this way: Let's say you earned $50,000 in a year, but had $55,000 in bills. You would have a $5,000 deficit. You would need to borrow $5,000 to make up the difference.

How the Government Borrows

The federal government borrows money by selling Treasury securities such as T-bills, notes, inflation-protected securities and savings bonds to the public. The government trust funds are required by law to invest surpluses in Treasury securities.

What is the National Debt?

The amount of the Treasury securities issued to the public and to the government trust funds is considered that year's deficit and becomes part of the larger, ongoing national debt.

One way to think about the debt is as the government's accumulated deficits, the Bureau of the Public Debt suggests. The maximum sustainable deficit is said by economists to be 3 percent of gross domestic product.

The Treasury keeps a running tab on the amount of debt held by the U.S. government.

The Impact of Both on the Economy

As the debt continues to increase, creditors can become concerned about how the U.S. government plans to repay it, notes Guide Kimberly Amadeo.

Over time, she writes, creditors will expect higher interest payments to provide a greater return for their increased perceived risk.

Higher interest costs can dampen economic growth, Amadeo notes.

As a result, she notes, the U.S. government may be tempted to let the value of the dollar fall so that the debt repayment will be in cheaper dollars, and less expensive. Foreign governments and investors could, as a result, be less willing to buy Treasury bonds, forcing interest rates higher.