Question

What is the difference between the federal debt and the budget deficit? Is a large federal debt a good, bad, or indifferent occurrence? Defend your answer. What are the dangers associated with a large federal budget deficit?

Answer 1

Federal debt refers to the debt level owned to the creditors by the federal government, whereas budget deficit is the excess of spending over the revenue collected by the government. Federal debt is also called as national debt that is accumulative in nature. In contrast to it, the budget deficit is specific to the particular year and year year, will have its own budget deficit.

Large federal debt is a bad occurrence, because it requires higher interest rates to be paid by the government, that further increases the spending. Besides, government gets tempted to increase the tax to repay the debt and it creates lower disposable income for the people. It makes coming generation to more under stress in the expectation of higher tax rates. The government will further try to reduce spending on social security programs, and It will create chaos in the society.

Dangers associated with the large federal budget deficit are as follows.

1. Increase in national debt, paying more interests and more tax to their own people

2. National debt surpassing the GDP and making government default as happened in the country of Turkey

3. Lesser future spending on development programs, making societies to suffer in coming years.

4. High inflation and poor purchasing power of the domestic currency.