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Jan 12, 2012 by daniel
Difference between Debt and Deficit
More often than not, the terms deficit and debt are used for one purpose. It is thereby important to learn how to distinguish these terms. Deficit comes about when spending is much more than the income generated. Public debts and deficits are associated with government outlays and receipts. Receipts stand for the currency that the government generates and outlays denote the currency spent by the government every year.
Deficit is calculated by subtracting the receipts from the outlays. Receipts are generally gained through social insurance, income taxes and excise, while outlays include things like construction and medical research. Whenever a deficit situation occurs, the treasury has to undertake borrowing so as to cater for the balance. To better understand deficit, consider using credit cards. Whatever amount that you are going to overspend will build up on your credit card account.
In contrast, debt is essentially the total sum of deficits. This means the deficits of a certain year are added to the present deficit. For example, when your monthly earning is $4000, but you exceed the limits by spending $4300, the deficit would be $300. After one year, all the monthly deficits add up to $3600. In this regard, $3600 is considered like the total debt.
Deficit exists in two parts, namely cyclical and structural deficit. Structural deficits are those that exist all through a business cycle. It is contributed by the high current tax levels. When a business cycle is low, the rate of employment is reduced and more spending will take place. In effect, the treasury borrows more money. The vats and taxes are consequently increased. This additional borrowing experienced at low points of business cycle is what is referred to as cyclic deficit.
Deficits are thus theoretically constant, whereas there is no instance where debts are constant.
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