To the financial layperson, the distinction between deficit and debt might be unclear, but they are in fact two separate and distinct economic concepts. Debts and deficits exist in all levels of the global economy, be it in households, businesses or even on the national stage. Debts are par for the course when it comes to large investments, but deficits are indicative of more far-reaching problems than manageable debt.
Understanding Debt
Debt is any long-term financial burden placed upon a consumer, business or even a nation to fund a long-term investment. At the home level, debts are incurred in a number of ways, most commonly as mortgages, car loans and consumer credit card debt. On the business level, debts are sometimes incurred when purchasing new capital equipment; for example, a delivery company may incur a vehicle debt when purchasing a new delivery van. On the national level, major projects such as investing in public infrastructure or the military may incur a long-term debt, which the government then needs to gradually pay back to its investors. National debt is usually owed to domestic companies, international firms and occasionally to other national entities. In simple terms, debt just refers to money owed, and as long as it is being paid back in a sensible and sustainable manner, it is not a problem in and of itself.
Deficit Defined
Deficit, unlike debt, relates to shortfalls with negative connotations. For example, if a government started a program buying new space shuttles but the project cost more than the projected amount, it would incur a budget deficit --- or, in simple terms, a monetary shortfall. Avoiding deficits at any level requires accurate budgeting as well as sufficient income to pay off debts and expenses in a sustainable manner.
Relationship Between Debt and Deficit
The real difficulty when deficits occur is that the money always has to come from somewhere. Either the overall debt will balloon, whether on the national, business or personal level, or a spending cut from some other source will be required to cover the difference. At the national level, ballooning debts due to deficits lead to weaker currencies and broader economic difficulties. On the business level, a company that is losing money may ultimately have to start laying off people or go bankrupt. Deficit in individual households may mean that the family could have its home, vehicles or property repossessed.
Combating a Budget Deficit
There are three ways to fight a budget deficit. The first is to nip it in the bud before it begins by sensible budgeting based upon realistic budget projections. At the home level, this would mean looking at past expenses and making realistic estimates based upon those pre-existing numbers. It is all well and good for someone to intend to spend only $25 on entertainment in the month, for example, but if the person lacks willpower and ends up breaking the budget commitment, that budget is pointless. Strong budgets need to be based on economic realities, not idealism.
The second way to fight a budget deficit is to increase income. Increasing the budget at the national level means raising taxes on someone, whether that means businesses, all private individuals or certain income groups. On the home or the business level, it means directly increasing earnings.
The third and sometimes most difficult way to combat the budget deficit is by slashing expenditures. At the personal level, this means limiting spending on the fun stuff; on a business level, this might mean putting an expansion program on hold, selling less-competitive business units or slashing the payroll, either by layoffs or personal pay decreases. On the national level, slashing expenditures means shutting down government programs, which can have negative social consequences and should be considered only as a matter of last resort. Public institutions like the military, police, and fire departments were set up in the public interest for a reason, and slashing their support on any level of government is a risky proposition.
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