June 17, 2006

Deficit vs Debt

I got directed to this post over at DailyKos in which they are discussing the crowing by the Bush Administration regarding revenues going up and cutting the deficit "in half." From bonddad's post, a quote from Investor's Business Daily

Aided by surging tax receipts, President Bush may make good on his pledge to cut the deficit in half in 2006 -- three years early.

Tax revenues are running $176 billion, or 12.9%, over last year, the Treasury Department said Monday. The Congressional Budget Office said receipts have risen faster over the first eight months of fiscal '06 than in any other such period over the past 25 years -- except for last year's 15.5% jump.

The 2006 deficit through May was $227 billion, down from $273 billion at this time last year. Spending is up $130 billion, or 7.9%.


Bonddad goes on to explain a bit of the smoke and mirrors designed to make us all think that the Republicans are great budget managers,and I highly recommend reading his entire post, concluding with this:
According to the CBO revenues from individual taxpayers totaled 809 billion in 2004 and 927 billion in 2005 - 6.7% less than when Bush took office. So after two tax cuts, we will probably have tax revenue levels above those when Bush took office 4 years after the first tax cut. Meanwhile, discretionary spending increased from 825 billion in 2003 to 967 billion in 2005 - an increase of 17%. So, through the end of 2005 we have a decrease in individual revenue of 6.7% and an increase in discretionary spending of 48%. Finally, the Republicans -- the party of fiscal conservatism -- have increased total debt from 5.6 trillion to 8.3 trillion over the last 5 years. That's 2.7 trillion dollars invested in government securites that could have been invested in the private economy. This is not the record of success; it is the record of blind adherence to a now debunked theory (if you can call something written on a cocktail napkin a theory.)

I don't know about you, but some of this econmic stuff makes my eyes glaze over, and the one thing I have always had a hard time understanding is the difference between deficit and debt. So I posted this in the comments section:
For some reason, I have always had problem understanding the difference, so I call on greater minds than mine to help me "get" it. When they refer to the budget deficit, I assume that to mean the difference between income and outflow. Is that correct? Is that number just calculated and recalculated for each year?

For example, if I earned $30K every year and spent $35K every year, my deficit is $5K per year. I have to find the $5K somewhere, so I borrow it, thereby creating debt. But I am broke, so all I can manage to do is pay the interest on the debt I am creating so my debt grows every year on into the future.

Then I have a year where I manage make $32,500 and I only have to borrow $2500 to meet my expenses. I'm still borrowing, just not quite as much, but I still have the old debt and continue to add to it because I still don't have enough money to actually pay down the principal. So, I have cut my deficit in half, but I have added to my overall debt.

Am I understanding this? Again, is the deficit amount an annual number vs debt being the cumulative total owed? Also, is the money I am borrowing considered income?

I realize this is a bit of an oversimplification, but am I getting the difference? (I also realize that the Bushies get away with this "cut the deficit in half" crap because they also purposefully overestimated the deficit they would have and also keep a lot of spending off the books.)

Bonddad replied to me that I am 100% correct. In fact, while I was composing my question, The Maven posted this:
What's making our situation so much worse is that so few Americans really understand the distinctions between the deficit (annual) and debt (cumulative). They hear that the deficit is being "cut in half", and they process that information to mean that the net amount that we've borrowed from future generations has been reduced. All we've actually done, of course, is merely slow the rate at which we're digging a deeper hole. Clinton's team began to fill it in; Bush's brought out a whole new backhoe.

Bringing it down:
Deficit = annual difference between income and outflow
Debt = total amount borrowed and all interest owed

And let us not forget that the Bush Administration has raised the debt ceiling FIVE times since taking office, bring our national debt to a whopping $8.3 trillion.

Party of fiscal responsibility my hind end!