Relationship Between Budget Outcome and Public Debt

Question 1

Relationship between deficit and public debt

Answer 1

If the government runs a deficit, it means that their expenses are greater than their revenues over a financial year.

They need to finance this by selling bonds

This increases the total stock of government (public) debt.

An increase in government debt leads to an increase in loan repayments, which is an expense for the government. Thus increasing the size of their future deficits. (all other things being equal)

Question 2

Relationship between surplus and public debt

Answer 2

If the government runs a surplus, this means its revenues are greater than its expenses over a financial year.

They may choose to use this surplus to pay down their debt.

This decreases the total stock of government (public) debt.

Question 3

Distinguish between Government Deficit and Government Debt

Answer 3

Government deficit refers to the situation where government expenses exceed its revenues for a specific year. Government debt refers to how much money the government has loaned by issuing bonds to investors in order to pay for previous deficits.

Thus the key difference is that a government deficit is related to current expenditures and revenues, whereas government debt is related to previous years where funds were needed to fund the government deficit.