A deficit is what happens when spending exceeds revenue in a given period. Governments run deficits when they spend more than they collect in taxes. Businesses run deficits when costs outrun income. Households run deficits when they spend more than they earn, though we usually call that debt.

Government deficits are not always bad. During recessions, deficit spending can stimulate demand and reduce unemployment. During wars or emergencies, deficits are unavoidable. The problem is chronic deficits that pile up into a large national debt. Interest payments on that debt can crowd out other spending.

Deficits are different from debt. The deficit is the annual gap. The debt is the accumulated total. A country can reduce its deficit without reducing its debt if the debt is large enough. Confusing the two is common, even among politicians.

Key points

• Deficit = spending minus revenue
• Debt = accumulated deficits
• Deficits can stimulate a weak economy
• Chronic deficits raise debt and interest costs
• Fiscal policy affects deficit size