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Thursday, May 10, 2012

How the U.S. national debt is different from federal deficit spending

National debt grows when there is a federal budget deficit
U.S. federal national debt is near 100% of Gross Domestic Product
The difference between government deficit and national debt is the deficit is thought of on an annual basis whereas national debt is long-term. Moreover, the deficit is the total expenditures and costs incurred by the federal government that exceed revenue from sources such as taxes in a given fiscal year, and according to the U.S. Bureau of Public Debt, national debt is the total debt which includes deficits and debt owed on financial instruments that has been accumulated by government over time.

To illustrate further, the annual federal budget deficit does not add the deficit or unpaid balances from previous years of deficit spending. The Congressional Budget Office (CBO) states the deficit is the net amount by which government 'outlays' exceed revenue for a given period. The forecasted budget deficit for 2011 is $1.645 trillion or 10.9 percent of GDP according to the 2012 U.S. Budget released by the U.S. Office of Management and Budget.

The national debt is the total amount owed on financial instruments such as Treasury bonds and deficit spending that has contributed to national debt. The CBO describes national debt as the total value of debt instruments issued by multiple federal agencies. Since the budget deficit is not financed by debt instruments, it is incorrect to conclude the national debt is the cumulative total of all unpaid deficits based on the CBOs definition of each.

Each year the government spends trillions of dollars
Health and human services is the largest national expense

The U.S. Bureau of Public Debt keeps an ongoing tally of total national debt which was  $14.287 trillion on April 29, 2011. This amount includes public debt and 'intragovernmental' debt which is debt held by government rather than the public. The national public debt was predicted to reach its legal limit on May 16, 2011 according to U.S. Treasury Secretary Timory Geithner and as reported by MarketWatch. Additional facts about the U.S. national debt are illustrated below:

The national debt became a money management controversy when it reached a percentage of Gross Domestic near 100 percent. President Obama addressed this issue by putting forward a proposal to cut this debt by $4 trillion within 12 years according to Bloomberg. However, opposition to this plan did not agree with the amount of tax increases that would be necessary to make the debt decline under Obama's plan.

Economic security is put at risk from excessive federal spending
The value of the dollar is negatively impacted by excessive national debt
In summary, government financing comes in the form of debt instruments such as bonds in addition to revenue from taxes where budgets are thought of in terms of government revenue and expenses where debt is a function of money owed on debt obligations. In light of this, three key variables including the type of financing, the time period for which fiscal policy takes place, and whether or not the negative balances are cumulative defines whether money owed is from an annual deficit or national debt.

Image attributions: Unforgettable fan; CC BY-SA 3.0,  Gene Simmons NDAC, CBO; US-PDGov, CC BY-SA 3.0, US-PDGov