- [Instructor] Two terms that you've likely heard
in the context of government spending and budgets
and borrowing are the terms deficit and debt.
And they can get a little bit confusing
because they're associated with borrowing and budgets
and spending and they both start with D.
And they are related but they mean different things.
A deficit is a situation where you spend more
than you are taking in.
So from a government point of view,
this would be a situation where a government spends more,
in a year than they take in, in revenue in that year.
So in a year, or budgetary cycle
spending more, spending more
than taking in.
And that difference,
the amount that you are over spending that year
is going to be a deficit.
A debt on the other hand is the total amount
that you owe.
So total amount, amount owed.
Now these are clearly related.
Let's say in, let me make a,
a hypothetical government here.
So let's say year one, year two,
year three, year four and I'll go up to year five.
And let's think about the deficit,
the deficit each year
and let's think about the debt each year.
So let's say in year one our hypothetical country,
we overspend by 200,
I'll do everything in billions of dollars.
So we overspend by 200 billion dollars.
We run a 200 billion dollar deficit.
Well assuming that the debt was zero before that,
we're now going to owe people 200 billion dollars.
I'm assuming everything here is in billions.
Alright, so let's say that next year,
we run a deficit of a hundred billion dollars.
Well now we owe the money that we owed before
plus another hundred billion dollars.
So this would be 300 billion
and then you could see where this goes.
If in year three we run another deficit
of let's say, let's say we spend a lot this year.
A lot more than we take in,
so we have a deficit of 500 billion.
Well then that will just add to our debt.
So that's now going to be 800 billion
and of course you can pay down debt.
In order to pay down debt
you would run a surplus in a year
which you could view as a negative deficit.
So let's say that this year it's negative 100.
So normally people wouldn't say
this is a negative 100 billion dollar deficit.
Normally they would say that the government
ran a 100 billion dollar surplus
but let's say they run that surplus,
they pay down the debt.
Well so now, they would pay it down,
so now we're at, we owe 700 billion
and of course you could have a year
where you have a completely balanced budget.
You're not running a surplus or a deficit
and in that case your debt would stay the same.
Now some of y'all might be wondering about the interest
but the interest on the debt,
that'd be part of the budget.
So we thought about that already on whether we're running
a surplus or a deficit.
To make this a little bit more clear
in the context of the United States
here is a chart that shows the total deficits and surpluses
for the United States from the late 1960's
all the way to near the present time
but then it projects out a decade
and these projections,
you should always take with a grain of a salt.
Whenever these bars are going downwards
those are years in which
our government is running a deficit.
The years where we are above the line,
those are where we are running a budget surplus,
where the government actually took in more
than it spent.
So big picture, deficits and surpluses
are talking about how much you are over or underspending
in a given year
while debts are talking about your accumulated amount
that you owe
and to make that clear
we can take a look at the total public debt
in the United States and this once again,
goes from the 1970's all the way to near the present.
And you can see that the debt
has accumulated in a pretty big way.
It's approaching, this says 20 million
but you have to look at this.
It says millions of dollars.
So this is 20 million million
or 20 trillion dollars of debt.
This is how much the United States Government owes
but some of you might argue that
"Hey look, the economy has grown a good bit.
"So what really matters is how much do you owe
"as a percent of GDP?"
So this shows as a percentage of GDP,
it's not quite as dramatic
but our government debt is now about equal
to our annual GDP.
So if you were to make an analogy to your personal life,
if you say made, $100,000 in a year
this is like having also $100,000 of debt.
Now an interesting question is,
what are the pros and the cons
of running a deficit in a given year?
Which is going to add to the debt.
Well some of the arguments in favor
of sometimes running a deficit
which will add to the debt
is that it allows a government to do
counter-cyclical fiscal policy,
or if you're into a recession, to have an expansionary,
expansionary fiscal policy
which we've talked about in other videos
often involves maybe lowering taxes
and increasing spending
and that could allow the government
to maybe make a recession less severe
which might allow everyone to be better off in the long run
and these things are all debated.
Now the cons are easier to think of.
One could imagine that at some point
the debt becomes unsustainable.
Debt unsustainable and there are definitely
examples of other countries
that have run such large debts
that they could not even service the interest.
Just remember whether it's just you individually
or a government, when you borrow money
you have pay interest.
At some point the interest could become
so significant that the government can no longer
afford to pay it.
And even if a government can pay the interest on the debt
that money that's being used for interest
could have otherwise been used for other things.
Another con of running large deficits
which could lead to large accumulated debts
is that it can affect interest rates
in the broader market.
So you could lead to an increase,
increase in interest rates.
Interest rates.
When we studied the money market
we would see that hey,
the more that the government is out there
trying to borrow money,
that's goIng to shift demand in the money markets
to the right
and if the interest rates increase
that could lead to,
what we've talked about before,
the idea of crowding out.
Or the crowding out effect
where because of increased interest rates,
fewer potential private borrowers
are gonna go and borrow money
which they might use to go out and invest things.
So those are, these are all very interesting things
to think about but the big takeaway here
is to not get confused between deficit and debt.
Deficits and surplus refer to how much you are
over or underspending in a given year.
Debt is the total amount you owe.