Download the Schwab app from iTunes®Get the AppClose

  • Find a branch
To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Do You Know the Difference Between Deficit and Debt?

Debt and Deficit Explained

Deficit and debt, while related, are not interchangeable terms. Put simply, a deficit is a shortfall of money coming in (income) relative to money going out (expenses). Debt, on the other hand, is the cumulative sum of money borrowed to cover deficits.

For example, if your income after taxes is $75,000 this year but you spend $85,000, you have a deficit of $10,000. To cover the difference, you would likely borrow $10,000, which would add to your debt.

If you reduce your spending next year to $80,000, you’ve cut your deficit in half, but you’re still spending $5,000 more than you’re earning, which means your debt still increased by 50%. In fact, after two years, your debt has grown to $15,000.

It’s likely you’ve heard about deficit and debt in the context of the federal government. When a news article cites the federal budget deficit, it’s referring to a single year’s shortfall, or the difference between what the government takes in from taxes and what it spends.

In order to fund the difference, the government borrows the money and adds to its debt. Each year that the government runs a deficit, it has to borrow more money, which in turn increases the national debt.

The national deficit has improved markedly since the last recession—from about 10% of gross domestic product (GDP) to less than 3% today. National debt, however, stands at around 100% of GDP. “And if you think that’s bad, total credit market debt—which includes public sector, private sector, financial and nonfinancial debt—is about 350% of GDP,” says Liz Ann Sonders, Charles Schwab’s Chief Investment Strategist.1

“History shows that when debt is in this high a zone, economic growth suffers,” says Liz Ann. That’s because as government debt grows, there’s less money to invest in the private sector.

1 Figures are as of 1/13/2016.

Performing Reformers-How Political Change Can Affect Stocks
Performing Reformers: How Political Change Can Affect Stocks
Avoid Tax Surprises From Mutual Fund Distributions
Mutual Funds: Avoiding Tax Surprises

Important Disclosures

The information provided here is for general informational purposes only.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.


Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.