5.4 Government Deficits and the National Debt
A budget deficit is one year's gap between government spending and tax revenue; the national debt is the accumulated stock of past deficits.
Get the flow-versus-stock distinction down: a budget DEFICIT means spending exceeds tax revenue in a single year (a flow); the national DEBT is the running total of all past deficits minus surpluses (a stock). A shrinking deficit still adds to the debt as long as it stays above zero.
Governments finance deficits by selling bonds, borrowing in the loanable funds market. That borrowing is exactly what drives up the real interest rate and sets up crowding out (Topic 5.5). Running a surplus does the opposite, adding to national saving.
Debt matters through its burdens: interest payments claim a growing slice of future budgets, and servicing debt may require higher future taxes or lower spending. Economists judge sustainability by the debt-to-GDP ratio rather than the dollar amount alone.
Key terms for 5.4
Using 'deficit' and 'debt' interchangeably. The deficit is a one-year FLOW; the debt is the accumulated STOCK, a smaller deficit still grows the debt.
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