Three Terms Everyone Must Understand

Dictionary and magnifying glass

As you look at economic data, there are three terms that everyone must understand: budget surplus, budget deficit, and national debt. Each fiscal year, when the accounting books are closed on September 30, the federal government ends the year with either a budget surplus or a budget deficit:

A budget surplus is when government revenues (that is, taxes paid by you and me) exceed expenses for the current year. (That’s good!)

A budget deficit is when government expenses (all the money the government spends) exceed revenues for the current year. (That’s not good!)

All during the year, whenever our nation’s expenses exceed income, the government pulls out the national credit card and says, “Charge it.” This means we finance our debt by selling government bonds (which are promises by the government to pay at some future time) to domestic and foreign investors (such as bond-market investors and other countries, such as China and Japan.) When we overspend (that is, have a budget deficit) we have to borrow money (by issuing more bonds) and the national debt increases.

The national debt is the total amount our nation owes its creditors (domestic, foreign, and intragovernmental lenders and investors). This figure includes all previous deficits (plus interest owed on all outstanding bonds) minus any payments the federal government has made to pay down the national debt.

YOUR PREP PLAN: Be able to explain these three important terms.

  • Budget Surplus (only 4 surplus in last 40 years)
  • Budget Deficit
  • National Debt
  • Keep up to date on the current amount of our national debt
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