Last week’s news that the United States hit the federal debt ceiling prompted the usual worries about its impact on government services and the economy, but it was hardly groundbreaking. Since 1960, Congress has acted 78 different times to permanently raise, temporarily extend or revise the definition of the debt limit, according to the U.S. Department of the Treasury.
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Whenever this happens, it leads to discussions about government spending — which in turn leads to confusion over the national debt and the federal deficit. Although they sound similar, they are two different things.
The federal budget deficit represents the amount of money the U.S. government spends minus the amount of money it collects from taxes, according to the Center on Budget and Policy Priorities. If the government collects more revenue than it spends in a given year, the result is a budget surplus rather than a deficit. When spending and revenue are equal, you have a balanced budget.
The deficit is greatly influenced by how the U.S. economy is doing. During periods of robust economic growth, tax revenues tend to increase, which can lower the deficit and even lead to a surplus. A strong economy also lessens the need for government spending on social safety net programs. But when the economy struggles and the government needs to spend more — like during the COVID-19 pandemic — the deficit rises.
The U.S. has experienced a fiscal year-end budget surplus only five times in the last 50 years — most recently in 2001, according to data from the U.S. Department of the Treasury. During fiscal year 2022, which ended on Sept. 30, 2022, the federal government spent $6.27 trillion and collected $4.90 trillion in revenue, resulting in a deficit of about $1.38 trillion.
As the CPBB noted, the $1.38 trillion deficit represented around 4% of the gross domestic product. That’s way down from the 9.8% reading it reached during the Great Recession and the 15% it reached in 2020, at the peak of the COVID-19 shutdown. But it is still much higher than its recent low point of 2.4% in 2015.
As of Jan. 23, 2023, the federal deficit had declined to about $421 billion, according to the Treasury Department’s FiscalData tracker.
In contrast, the national debt is the cumulative amount of money the government has borrowed throughout its history. When the government runs a deficit, the debt increases. Likewise, when the government runs a surplus, the debt shrinks. The national debt stood at roughly $31.4 trillion as of Jan. 23. That figure has been on an upward trajectory for 40 years and has increased at an even faster rate over the past 20 years.
Here are the three measures of the debt, according to the CPBB:
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Debt held by the public. This measures the U.S. government’s borrowing from the private sector (including banks and investors) and foreign governments. Debt held by the public reached $24.2 trillion in fiscal 2022, according to the Treasury Department. That figure has more than doubled over the past decade.
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Debt net of financial assets. Also known as net debt, this measures debt held by the public minus offsetting financial assets held by the government — including cash, gold and the value of the U.S. Treasury’s portfolio of loan assets, such as federal student loans.
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Gross debt. This refers to debt held by the public plus the securities the Treasury issues to U.S. government trust funds and other special government funds, such as the Federal Deposit Insurance Corporation.
As the CPBB pointed out, debt held by the public is a much better measure of the national debt’s impact on the economy than gross debt. That’s because the public debt reflects the demands that the government is placing on private credit markets. Net debt is an even better measure of the government’s financial position and its effect on the economy because it includes loan assets that offset some of the borrowing.
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The debt ceiling, or debt limit, is a restriction imposed by Congress on the amount of outstanding national debt the federal government can have, according to the Treasury Department. It allows the government to pay for programs and services such as Social Security and other income security programs, Medicare and other health services as well as national defense.
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This article originally appeared on GOBankingRates.com: Debt Ceiling 2023: How Federal Deficit and National Debt Differ
