Deficits and Debt Confusion

My comments may prove elementary for many readers, but for others (and most politicians), they should prove highly informative.

I frequently hear people refer to “debt and deficit” as if they were one thing. I don’t know if they know the difference, but if they do, using them together may confuse others.

The Distinction

To unravel the debt and deficit confusion requires understanding the difference between “levels” and “rates” (sometimes referred to as “stocks” and “flows”). To help with this explanation, I would like you to visualize a bathtub. (I will describe rates first and levels next.)

The typical bathtub has a pipe that brings water to the bathtub and a drain that takes water out of the bathtub. We refer to the quantity of water that flows into the tub (or out of the tub) over a specific period of time as the “rate.” We might state the rate in terms of gallons per minute.

We might measure the water level at any specific time and refer to that as the “level.” The level might be stated in terms of gallons.

Financial Example

If a company borrows a hundred thousand dollars each year for five years (rate), at the end of five years, it will have a debt of $500,000 (level).

If this company has revenues of $900,000 a year (rate) but spends $1 million a year (rate), it would be running a deficit of $100,000 a year, which consists of the amount of their borrowing.

Federal Deficits

Federal deficits operate in much the same fashion as the financial example I gave above. The government has an inflow of funds that comes from taxation. It also has an outflow of funds from “spending,” which I prefer to call redistributions.) When the redistributions exceed the inflows from taxation, the government has a deficit.

We measure deficits over a period of time, which makes them a rate. We also measure borrowing over time, making it a rate also.

Federal Debt

Each year that redistributions exceed tax revenues, the government finances that deficit by borrowing money. When the borrowing for that year gets added to the debt from the previous year, we have an increase in the federal debt. We measure that new debt figure at a fixed point in time with a fixed amount of money.

Debt & Obligations

In business, they use the term “off-balance-sheet” financing. The primary example of off-balance-sheet financing consists of business leases. They consist of long-term obligations that do not appear on the balance sheet.

Politicians do a lot of gum-beating about the federal debt, but they tend to ignore many of the long-term obligations, which far exceed the amount of federal debt.


The distinction between debt and deficit has significant ramifications concerning federal financing.

Don’t get fooled by the politician who talks about cutting the deficit. That does not mean cutting the debt. It only means that debt will grow more slowly

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