Difference between Budget Deficit and National Debt

June 6, 2016 by Editorial Team

You may have heard a lot of people throw these terms around and more than once you may have suspected that they were not being used correctly. Even so, you probably didn’t feel comfortable intervening because you were afraid you didn’t have a good grasp of the difference yourself. In this case, take a look at what budget deficit and national debt are and how you can tell the two apart.


Budget deficit vs National debt

A budget deficit is a term usually used when referring to a state’s budget and it illustrates a situation in which the government has approved of expenses which surpass the national budget. This means that the money coming in from income tax, unemployment insurance and all forms of economic growth which generate state revenue are no longer enough to cover the expenses of running the country. This situation can also arise when taxes are lowered without the expenses being correctly balanced out. Tax evasion and poor collection of taxes are secondary causes which can lead to a budget deficit in the sense that, even with the proper calculation of incoming money from the government – enough to cover the expenses – the fact that the expected money does not reach the national budget can cause this imbalance.

National debt represents the amount owed by a Government. It can be split into internal debt, which means what the people owe internally to different types of lenders, and the external debt contracted by the government from foreign lenders. Since accumulating national debt is something politicians may be accused of and criticized for, information about the situation can sometimes be presented in ways that are lacking in clarity. In order to level this debt, the Treasury usually issues securities and bonds which it sells to the people in order to borrow some of the money needed in order to keep operating.

Such situations usually imply government efforts to increase tax revenue by attracting investors, but also by taking the money out of services for the people. This means a decreased standard of living. National debt comes with an increase in inflation and of all the prices of products and services. Operations in such a country will be viewed as risky, and getting new capital into the country will become very difficult. Consequently, personal investments and purchases will be limited, if not even impossible. This can be the long term consequence of the national debt and illustrates how individuals can be affected by it.

Budget deficit vs National debt

So what is the difference between budget deficit and national debt?

The budget deficit means spending more than cashing in while the national debt means money owed. More than there being an easily noticeable difference between the two, they are actually connected. The national debt is an accumulation of budget deficits, to which money owed to other countries is added. Economists say that a reduction in deficit will not automatically reduce the national debt as well. While budget deficits are the ones more easily run up, the national debt has a bigger effect on the economy and is the one which decreases the living standard. People may not react to numbers saying how much each individual owes but they get a better idea when they are told how much of the GDP should go into paying off the national debt.

Comparison Chart

Budget deficitNational debt
Is created when the government’s expenses are higher than the government cash-insIs created when the budget deficit piles up and when money is owed to foreign powers
Can be reduced by proper tax collectionReducing the budget deficit may not reduce the national debt as well
Affects the budget more than the individualsTakes a severe toll on the individual’s living conditions