Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Distinguishing between deficit and debt

The economic crisis of the late 2000s meant that large amounts of private sector liabilities were transferred to the public sector. (You can read more about this in Chapter 16.) Ever since then, governments around the world have been trying to deal with the fiscal repercussions.

The UK in particular has seen a strong focus on ‘getting the deficit down’. Politicians regularly justify their decisions with reference to the effect that they’ll have on the fiscal deficit and the national debt. Therefore, more than ever, people need to have a good understanding of what exactly these terms mean and how they’re related. Luckily, that’s precisely what we provide in this section!

Fiscal deficit


A fiscal deficit, often just called a deficit for short, refers to the case where the government is spending more on government purchases (G) than it earns through taxation (T). The opposite of a deficit is a fiscal surplus, where the government spends less than it earns through taxation.

Sometimes thinking about the fiscal balance is useful: the amount of tax revenue less government spending (T – G). When the government runs a surplus, the fiscal balance is positive, and if it runs a deficit, the fiscal balance is negative.

The fiscal deficit is a flow variable, which means that you need to specify the period of time you’re talking about. Just saying that the deficit is £1 billion doesn’t mean anything unless you also say

something like ‘the deficit was £1 billion in 2015 or £600 million in the first quarter of 2015’.

Nevertheless, sadly, you still hear people quoting the amount of the deficit without reference to the time period. In this case, usually the person is referring to the most recent quarterly or annual deficit (or surplus).

Figure 11-1 shows the UK fiscal deficit from 1970 to the present day – and it’s not a pretty sight! Except for a few years in the late 1980s and late 1990s/early 2000s, the UK has been running fiscal deficits. Furthermore, in the recent past (since the late 2000s), the fiscal deficit has been large, and despite all the cuts in government expenditure since then, it has persisted.


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Figure 11-1: UK fiscal deficit.


These numbers make sense when you consider that one of the consequences of the financial crisis and the long recession that followed was to make it much harder for the government to collect tax revenue – people and firms just weren’t making as much money. At the same time, increased unemployment put pressure on government welfare programmes.

National debt

Whereas the fiscal deficit is a flow variable, the national debt is a stock variable. It tells you how much money the government owes at any given time to its creditors (the people who’ve lent it money over the years). For example, in early 2015 the UK national debt was around £1.5 trillion, which means that at some point the government will have to pay this amount back (plus interest) from future tax revenue.


An intimate relationship exists between the fiscal deficit (when government spending is greater than tax revenue) and the national debt (see Figure 11-2). The national debt is basically the accumulation of all past fiscal deficits. Think about it like bathwater (bear with us):


The fiscal deficit is like the clear water that flows from the tap:

Whenever government spending is more than tax revenue, this situation causes the tap to run and the bathwater to increase. The difference between spending and tax revenue must be covered by new borrowing, which adds to the national debt.

The national debt is the dirty bathwater as a whole (that causes your

skin to wrinkle like a prune): It’s an accumulation of all the previous fiscal deficits. But if the government runs a fiscal surplus (government spending is less than tax revenue), some of the bathwater can drain away; that is, the difference between spending and tax revenue can be used to pay off existing debts, which reduces the national debt.

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Figure 11-2: Debt versus deficit.


In the UK, much of the political debate over the past few years has focused on austerity, the deficit and national debt. Politicians vie with each other as to who will balance the books and reduce the deficit the quickest. Despite all the bluster (and the spending cuts), you might be surprised to learn that in 2014 the UK ran a budget deficit of £87 bln. That is, not only did the UK not manage to pay off any of its debts, it added to them substantially!