6 Explain the difference between the federal budget deficit

6. Explain the difference between the federal budget deficit and the national debt.

Solution

Federal budget deficit is a flow concept, which measures the excess of government expenditure over tax revenue during a period (e.g. a quarter or a year). On the other hand, national debt is a stock concept that is measured at a specific point of time, and this is the accumulated amount of current year and prior year total of government budget deficit and surplus. In the current year, if there is a budget deficit, national debt will increase, but if there is a budget surplus, national debt will decrease.