Debt & Deficits

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.

Australian Banks Have a Problem

Higher mortgage rates will mean that households face higher mortgage costs, which could decrease savings growth even more. Higher rates with no wage growth could also mean that borrowers applying for new loans face higher…

Winning Streaks Always End

Our economic winning streak is in record breaking territory. The last recorded recession in The Lucky Country ended in June 1991. But that’s not how life should work.

Fantasy Island

Fantasy Island is a paradise in the Pacific Ocean. The island’s GDP output is $500k. There is no debt. One day, a fellow calling himself Charles arrived on the shores of Fantasy Island.

Why Social Security Must Fail

A headline from The Wall Street Journal: ‘Social Security Expected to Dip Into Its Reserves This Year’. What reserves? Ah…the ‘Trust Fund’. But what’s in the trust fund? What else? US Treasuries.

Crises Leave Their Scars

Having had so many years without a crisis has meant that Australia is one of the few countries in the world still able to offer a range of opportunities. But, there are worrying signs.

Markets & Money