In terms of public spending, a deficit is the annual shortfall between spending and tax revenues. Debt is the total amount outstanding to holders of the government’s debt.
Definition of deficit and debt
- Deficit refers to the annual borrowing requirement of the government. (often referred to as budget deficit – or annual net borrowing)
- Debt related to the total level of public sector debt built over previous years. (often referred to as national debt/public sector debt)
Budget deficit – net borrowing
This graph shows the annual amount the government have to borrow. In recessions, there is a sharp rise in the annual deficit.
This is the deficit expressed in monetary terms, e.g. in 2008/09, the budget deficit was £152bn.
- Public sector net borrowing (PSND) – annual borrowing requirement
This is net public sector debt as a % of GDP since 1945. Note. Even with a budget deficit, total debt can fall because of economic growth and rising GDP.
Deficit falling but debt rising
It is possible for the annual deficit to fall, but debt to continue to rise.
In 2012/13, the UK deficit was £122bn. In 2013/14 this fell to £102bn. So the deficit was lower, but the debt still increased by £102bn.
Which is most important?
Both are important. Markets will look at both annual deficits and total public sector debt in determining the credit worthiness of a government
- A high public sector borrowing requirement means there will be a rapid increase in total debt. Markets may feel this rapid increase in debt means the government may struggle to keep up and meet interest payments.
- However, a low public sector debt give a government more room for maneouvre.
Markets will also look at:
- Average maturity of government bonds – how soon do government have to refinance debt?
- How much debt funded by oversees?
- What are forecasts for economic growth and future tax revenues?
Another potential confusion is between a budget deficit (government spending greater than tax revenues) and the trade deficit (imports greater than exports) See: Government debt and trade deficit