Question

a) What is the difference between government budget deficit and national debt?

b) What is a sovereign debt crisis? Why do we need to look at the national debt as a percentage of country’s GDP instead of just in terms of trillions of dollars?

c) Carefully explain why an increase in debt-to-GDP ratio would lead to a higher deficit? (You should describe 3 links connecting debt-to-GDP to deficit). Why is this a problem?

Answer 1

a. What is the difference between government budget deficit and national debt?

Government Budget Deficit is the term used to describe a situtation where the government spending exceeds the revenues generated.The government earns revenue in the form of various taxes and spends them on activities like healthcare,social security,national defence etc.Every year the government prepares a budget showing its income as well as expenditure.A balanced budget is one where the income is equal to the expenditure.The budget shows a surplus where income exceeds expenditure.There is a budget deficit when expenditure exceeds income.

National Debt also known as Government debt is the liability of the government.In order to run the financial operations of the country the government needs a large amount of funds which it borrows from other countries as well as various financial organisations.National debt when borrowed from sources within the country is known as internal debt.National debt when borrowed from foreign lenders is known as external debt.National debt is usually the result of constant borrowing of the government for the purpose of covering years and years of government deficit.

Let us understand these differences better.

Points of Difference	Government Budget Deficit	National Debt
Meaning	It is the shortfall of the governments income over its expenditure.	National Debt is the aggregate of the money owed by the government.
Time Period	Budget deficit is calculated yearly.	National debt is the total of all money over past years.
Representation	It represents the total annual borrowing of the government.	It represents the aggregate of all the outstanding amounts from over the past years.
Affects.	Government budget affects the the national budget more than it affects the individual consumers.	National Debt affects the overall standard of living of the indidividual consumers.
Constant or changing.	If the government spends carefully the budget deficit can be constant year after year.	The amount of national debt can never be constant,it is always changing.