What’s the difference between debt and deficit?

Debt and deficit are not the same thing. Many students (and adults) struggle with this distinction.

I can see why. I mean, these two terms sound similar. And they're quite closely linked. But something I try and push in my classes is the need to be precise. This goes back to my journalism days where a colleague once told me that each line of writing needs to be clear and accurate, free from misunderstanding.

This takes us to debt and deficit. Let’s start with deficit. A deficit is when spending exceeds income. Basically, an individual is in deficit when their expenditure is greater than what they earn - - from jobs, investments, etc.

By spending more than they have, these people are in deficit. If we look at this from a government context, if government spending (G) exceeds taxation revenue (T, the main source of government income), then the government is in deficit. More specifically, the government runs a budget deficit.

OK - - this is deficit. And now debt?

As a government, if I'm running a deficit, my spending commitments are larger than my resources. And if I wish to follow through with my planned spending, I need to find the extra money. Most likely I need to borrow the amount of money to fill the gap between spending and revenue.

By borrowing money, the government will incur debt. In this way, a budget deficit will create the need for debt.

Theoreticallly, I could have a deficit but no debt. However, this means I cannot follow through on all my spending commitments. I don’t have sufficient funds. If I'm a business and I have deficits but don’t borrow to fund these deficits, I might have to shut down.

Hopefully this helps to clarify the difference between debt and deficit. They're similar but not the same.