Explainer: The Deficit vs. the Debt

In light of the release of President Obama's 2012 budget proposal, Hotsheet figured it's as good a time as any to explain the difference between two words that often get confused in economic discussions: deficit and debt.

Put simply, the deficit is the amount that the government's spending exceeds its revenues -- the amount it takes in -- in a given year. Let's say the United States takes in $10 billion in a particular year, but it spends $15 billion. The deficit for that year is thus $5 billion. (The actual figures are, of course, far larger - the budget deficit in fiscal year 2010 was $1.29 trillion.)

The debt, meanwhile, is what you get when you add up all these yearly deficits - it's the total amount that America owes. Each year's budget deficit, then, adds to the total debt figure, which is currently more than $14 trillion. 

In his proposal out Monday, President Obama proposed to cut deficits by $1.1 trillion over ten years. But even if that happens, America will still be running a yearly deficit - and thus will keep adding to its debt. The only way that America can reduce its debt is to run budget surpluses - that is, to take in more money than it spends each year.

Here's one way to think of it: Reducing the budget deficit is sort of like plugging a leak on a boat -- but only partially. Sure, there's less water coming in. But the boat is still sinking.