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

        Money | Economic Concepts

Economic Impact of Budget Deficits and National Debt

Why do we worry so much about the budget deficit and the national debt? Congress hasn't balanced a budget in decades, and the national debt keeps growing exponentially, but the United States is still one of the most prosperous nations in the world. What exactly are the potential pitfalls of living in the red?

According to a 2012 report by the Congressional Budget Office, there are several serious economic consequences associated with the ballooning national debt.

  • For one, the more money the government owes, the more interest payments it has to make, which drains even more money from the federal coffers. From 2013 to 2022, the government will spend 14 percent of its revenue — $5 trillion — paying interest on the national debt [source: Sahadi].
  • Without the ability to save money, the government has fewer resources to respond to a natural disaster, a severe economic downturn or other financial crisis.
  • If the U.S. defaults on its interest payments, it could lose its credit rating, eroding investor confidence in U.S. Treasury bonds [source: CBO].
  • Fewer creditors mean less borrowing power; the government would have to cut back drastically on critical programs.

While politicians generally agree that large budget deficits and a runaway national debt are bad for the economy, they are sharply divided on how to solve the problem. The White House and congressional Democrats have proposed a mix of spending cuts and increased revenue in the form of higher taxes on the wealthy. A majority of congressional Republicans have rejected the idea of raising taxes and want to achieve deficit reductions through spending cuts and reform to the large "entitlement" programs of Social Security and Medicare.

Meanwhile, some prominent economists question the logic of paying down the national debt while economic growth is still weak. They think cuts in government spending will lead to job loss and a shrinking economy [source: Krugman]. Congress has to decide which is worse: derailing the economic recovery with short-term austerity, or threatening the fiscal future with piles of unpaid debt? Can congressional leaders strike a smart compromise? With a congressional approval rating of 13 percent in March 2013, the majority of Americans aren't holding their breath [source: Newport].

For lots more information on debt, budgets and national politics, check out the related HowStuffWorks links on the next page.