The deficit is the difference between what the federal government takes in (receipts) and what it spends (outlays). Seems pretty simple, if you spend more than what you get, you have a deficit.
Government receipts include the various taxes and fees that the government collects as well as other income. Government outlays include all federal spending which consists of social security, Medicare, defense spending and all other spending by the various federal agencies whether it be the EPA, Department of Education, or NASA. Federal spending also includes interest payments on our federal debt.
When the government runs a deficit, it must borrow to finance that deficit. To borrow, the federal government sells government securities to the public and government trust funds (also called intergovernmental holdings) through the U.S. Treasury Department. The Treasury sells securities like Treasury bills (T-bills), Treasury notes, Treasury bonds, Treasury Inflation Protected securities (TIPS) and savings bonds. These securities promise to pay a certain amount with interest at a future date in return for money to pay its current expenditures. This borrowing increases the federal debt which can be thought of as the total accumulation of deficits minus any surpluses over time. It is important to distinguish between the deficit and the debt. If theU.S.were to have no deficit this year (which is not the case), we would still have a national debt.
Over time, our national debt has continued to rise as the annual federal deficit continues year after year. We, as a country, continue to spend more than we take in. We have all seen stories about the National Debt Clock. Our current national debt is approximately $14.3 Trillion!!
Our national debt continues to rise because our government continues to approve budgets with deficits. Here is an interesting graphic that illustrates a $1.27 trillion deficit for the proposed 2011 budget.
In my next article I will outline who owns our national debt because it is important to know who we owe money to.