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What's the difference between the U.S. deficit and the national debt?

        Money | Economic Concepts

What Is the National Debt?
Complaining about the national debt is nothing new.  This engraving from 1789 has the caption:  "Everybody carry the burden of Taxes and National Debt."
Complaining about the national debt is nothing new. This engraving from 1789 has the caption: "Everybody carry the burden of Taxes and National Debt."
French School/The Bridgeman Art Library/Gettiy Images

Congress is responsible for approving the annual budget, but it's the Department of the Treasury that has to come up with the cash to pay for it. In an ideal world, the Treasury would act like a national piggy bank, saving up sufficient tax revenue to pay for each federal program. But in reality, the piggy bank routinely runs dry, and the U.S. government needs to borrow money to pay its bills.

The national debt represents the total amount of money that the federal government has borrowed to cover its annual budget deficits. As of March 2013, the national debt stood at $16.7 trillion [source: Dept. of the Treasury]. Technically the U.S. doesn't owe that entire amount to its creditors. Around $4.8 trillion is held by various government trust funds, so only $11.9 trillion is considered debt held by the public.

So who exactly are these creditors and how do they lend money to the government? If you have ever purchased a U.S. savings bond or received one as a gift, then you are one of those creditors (congratulations!) By purchasing a $50 savings bond, you are lending the government $50 at a low interest rate. Until you cash in that bond, that $50 plus interest is added to the public debt.

Of course, the U.S. government doesn't owe $11.9 trillion in bar mitzvah gifts. The government borrows most of its money by selling Treasury bills (T-bills), Treasury notes (T-notes) and other government securities to people, corporations, banks, state and local governments, and foreign governments [source: Dept. of the Treasury]. As of December 2012, the People's Republic of China owned $1.2 trillion in Treasury securities and Japan owned $1.1 trillion, making them the two largest holders of the U.S. public debt [source: Dept. of the Treasury].

Throughout America's history, the country has run some heavy deficits during times of war like the Revolutionary War of 1775 to 1783 and World War II, which it joined in 1941. It generally recovered post-wars thanks to economic growth and less military spending. But the current situation is different as there now many more mandatory expenses, like Medicare, tax cuts amid increased military spending after 9/11, as well as the fallout from the Great Recession of the late 2000s [source: Phillips]. Sixteen trillion dollars is a staggering sum, and as long as the government runs a budget deficit, that number will keep rising.


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