In much of the recent coverage of the country’s fiscal situation, the terms “deficits” and “national debt” are used interchangeably by policymakers and the media, even though they mean very different things.


What’s the Deficit?


The deficit refers to the difference—in any single fiscal year—between the amount of money the federal government spends and what it collects in taxes. For example, in fiscal year 2011, the Congressional Budget Office expects the government to raise $2.228 trillion in taxes and spend $3.708 trillion on programs. The difference – $1.48 trillion – is this year’s projected deficit.


What’s the National Debt?


The national debt is what you get from adding up all of the federal deficits accumulated from year to year. Whenever there is a deficit, the government adds to the national debt by borrowing money—from citizens, investors, pension and mutual funds, foreign governments such as China—to pay its bills. It does this by selling Treasury bills, U.S. Savings Bonds and other securities. The national debt also includes money that the federal government owes to itself, such as to the Social Security Trust Fund. On August 1, 2011, the national debt was $14.34 trillion—an amount just shy of the U.S. gross domestic product for 2010, which was $14.5 trillion.


What’s the Debt Limit?


In 1917, Congress put a statutory limit on the total amount of money the federal government can borrow. This debt limit was part of the Second Liberty Bond Act of 1917, which helped finance America’s entry into World War I. Congress has raised the debt limit 11 times in the last decade—from $5.95 trillion in 2001 to its current limit of $14.694 trillion (with more expected increases in the future).


What’s the Problem?


The government hit the current debt limit at the end of May and only narrowly avoided a “default” on its bills when Congress and the President passed the Budget Control Act of 2011 to raise the debt limit by up to $2.4 trillion—enough to get us to 2013. Many believe that had it occurred, a default would have plunged the U.S. economy back into recession and perhaps even global economic instability. The new law immediately raised the debt limit by $400 billion and allows for additional automatic increases so long as Congress doesn’t pass a “joint resolution of disapproval” to block it. The law also created a new joint committee whose task will be to propose a plan by this November for $1.5 trillion in deficit reduction over the next ten years.


Key Facts

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