Debt vs Deficit – what’s the difference?

Similarly, the word ‘debt’ features very heavily in today’s society. Quite apart from the level our country is ensconced in, the prevalence of pay-day loan companies and endless credit card options means we’re never far from the ‘d’ word.

It may seem odd, then, that many people aren’t aware of the difference between the two terms. What do they mean exactly?

If this sounds familiar, prepare to be enlightened! In this blog post, we’ll answer the question: debt vs deficit – what’s the difference?

What is debt?

We’ll start with the easy one. Debt simply refers to the amount of money owed by a person, company or – indeed – government. It may be new, fresh debt, or it may have built up significantly over many years.

Debt involves two parties – the creditor and the debtor. The former will have lent the latter money with a clear repayment instruction and deadline for adhering to the terms. The repayments, usually, will have interest added to them which is how the creditor makes a living.

If debts are not repaid on time, the debtor becomes insolvent and can risk bankruptcy. Being in debt isn’t a bad thing at all providing the borrower can afford the repayment terms.

Borrowing enables individuals to enjoy something now and in the future (such as a new television) but spread the cost over a period. Credit card debt can make life easier to cover unexpected expenditure and is very useful providing its use is controlled and does not overstretch the debtor. If you’re a home owner, you probably possess the largest of personal debt in the form of your mortgage, but borrowing amounts which cannot be comfortably repaid is where the problems start.

What is a deficit?

This is a little more tricky to explain. Consult a dictionary, and you’ll find something along the lines of ‘the amount by which something, especially a sum of money, is too small.’ But what on earth does that mean?

If you’ve ever done a household budget, you may have inadvertently uncovered a deficit of your own. Put simply, if you’re spending more than you’re earning, you are in deficit; i.e. the amount of money you’re bringing into the house is simply too small to support your lifestyle. The same premise can be applied to businesses and governments.

Running a household or business on a deficit is rarely sustainable, but is often unavoidable and may be purposefully instigated for a short period of time. As things level out and income overtakes expenditure, the deficit is wiped and its antonym, ‘surplus’ can be used. Just as being debt-free is a great place to be, possessing a surplus really is a very good thing indeed.

Are debts and deficits linked?

Sometimes, yes. If a deficit is covered by borrowing money, the debtor in question is increasing his debt. Similarly, if an individual or organisation runs a deficit, the net result is overspend, which often adds to the debt.

When times are good and the debt can to be repaid, it should be remembered that doing so will not improve the deficit. That is an issue which must be tackled separately by normalising income and expenditure.

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