Debt. Deficit. The most loaded terms in all of macro finance.
In short, debt means money owed, whereas deficit means the shortfall of money in a budget.
A deficit occurs when a government’s spending is greater than its tax revenue, otherwise known as deficit spending. The national debt is the accumulation of each year’s deficit.
Seems pretty simple, right?
Yet every year, you can find a few candidates who don’t know the difference between these two important concepts.
Alas, some get elected.
A Boost to Economic Growth?
Although it may sound negative, deficit spending — and the resultant debt — can boost economic growth. Especially during a recession. Deficit spending pumps liquidity into an economy, creating jobs and boosting production. Fiscal austerity to align spending with lower tax receipts often further harms the economy.
The trouble comes when repeated deficits build up and the cost of debt servicing grows. In every subsequent budget, the interest burden detracts from productive spending. Further debt has a less positive effect on the real economy, as more of every borrowed dollar must be dedicated to servicing old debt.
Of course, government debt isn’t our only concern. In the 2008 Global Financial Crisis, it was private housing debt that created the rot which threatened to crumble the entire US economy, and from there, the world.
Australians are no strangers to this, with our lengthy housing boom and record levels of household debt. This has helped banking swell to one of the largest sectors within the Australian stock market, as well as a looming risk that Australia may see a similar housing crash.
The benefits and drawbacks of deficit spending and debt are important to understand. That’s why we’re here to help. Our editors cover this topic regularly to ensure you’re aware of escalating debt worldwide, and how it impacts interest rates, currencies and share markets.
Read the latest news and analysis on debt and deficit, and how it affects you, below.