What is the difference between government deficits and national debt

The deficit is the annual difference between government spending and government revenue. Every year, the government takes in revenue in the form of taxes and other income , and spends money on various programs , such as national defense, Social Security, and healthcare. If the government spends more than it takes in, then it runs a deficit. If the government takes in more than it spends, it runs a surplus. The U. The U.

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In that case, the argument goes, we owe it to ourselves. Drawing on the work of James Buchanan, particularly his book Public Principles of Public Debt: A Defense and Restatement, Boudreaux argues that there is a burden of the debt and it is borne by future taxpayers.

Boudreaux argues that all public expenditures have a cost—the different financing mechanisms simply determine who bears the burden of that cost. Boudreaux discusses the political attractiveness of debt finance because the taxes lie in the future and those who will pay for them may not be clearly identified.

The conversation closes with a discussion of the role of expectations in both politics and economics of debt finance. Looking at historical data of tax rates compared with government revenue, he shows that government revenue has remained essentially constant since , despite wide changes in marginal tax rates.

Davies concludes by suggesting that the optimal tax policy is be a simplified system with low rates. Do government budget deficits matter? The crucial factor in determining how bond finance affects the economy is whether people recognize what is going to happen over time. If everybody foresees that future taxes will nullify future payments of principal and interest, then bond finance is equivalent to tax finance, and government debt has no effect on anything important.

If people do not foresee all the future taxes implied by government debt, then they feel wealthier when the debt is issued but poorer in the future when, unexpectedly, they have to pay higher taxes to finance the principal and interest payments.

So, what do people expect? Even though economists have been studying this issue for more than twenty years, they have not yet reached a consensus. Direct measures of the effect of debt on economic activity are straightforward in principle but difficult to construct in practice.

Overall, though, the evidence favors approximate Ricardian equivalence…. Measuring the government budget deficit: Federal Deficit , from the Concise Encyclopedia of Economics. Imagine that you are in complete control of the finances of Freedonia.