The Difference Between the Debt and the Deficit

In this age of stimulus spending and bailouts, “debt” and “deficit” are often used to describe the federal government’s financial situation. Many people use these words interchangeably, yet they have significantly different meanings. This explanation may help you understand the conversation.

Budget deficit. When the federal government spends more money in a fiscal year than it collects in tax revenue, it creates a budget deficit. In the rare instances when government expenditures are less than tax revenues, the result is a budget surplus. Budget deficits have been the norm in recent decades. For example, in the past 28 fiscal years (1982 to 2010), there were only four years in which the federal government ran budget surpluses.¹

National debt. How can the government spend more than it collects? By borrowing money. The total amount owed by the federal government is called the national debt. Because the federal government guarantees the timely payment of principal and interest, many individuals, corporations, state and local governments, foreign governments, and others are willing to lend their money. Although Treasury securities pay relatively low interest rates, they tend to appeal to investors seeking lower risk.

There’s also quite a bit of borrowing between federal agencies. For example, Congress has long been in the habit of borrowing excess Social Security revenues. As a result, the national debt is divided into two categories: debt held by the public and intragovernmental holdings.

As you can imagine, there’s considerable debate over how long the government can keep borrowing to finance spending. Regardless of how you feel about government spending, you might benefit from understanding the terminology.

1) Haver Analytics, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Securities Offered Through ValMark Securities, Inc. Member FINRA, SIPC Investment Advisory Services Offered Through ValMark Advisers, Inc. a SEC Registered Investment Advisor 130 Springside Drive, Suite 300, Akron, Ohio 44333-2431* 1-800-765-5201. The Giles Financial Group is a separate entity from ValMark Securities, Inc. and ValMark Advisers, Inc.

PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. ValMark Securities, Inc. makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is ValMark Securities, Inc. liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

Investors should consult with their own professional advisor regarding the potential tax, estate, and legal considerations that may arise in connection with entering into a life settlements transaction. Proceeds from a life settlement transaction may be taxable under federal or state law to the extent the proceeds exceed the cost basis. The proceeds from a life settlement transaction may be subject to claims of creditors. The receipt of proceeds from a life settlement transaction may adversely impact eligibility for government benefits and entitlements. The amount received for the sale of the Policy may be impacted by the circumstances of the particular purchaser of the Policy, the insured’s life expectancy, future premiums, the death benefit, the terms of the Policy, and the current market for insurance policies, among other factors. The amount received for the sale of the Policy may be more or less than what others might receive for the sale of a similar policy. There may be high fees associated with the sell of a Life settlement.

Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as a financial planner.