Policy Basics: Deficits, Debt, and Interest

It’s difficult to have a well reasoned public debate when the public is largely uniformed about public policy. The Pew Research Center conducts regular polls on the public’s knowledge of the political process and public policy issues. In general the public is often uninformed about specifics of public policy (which part of the budget is the largest), but generally well informed about public policy that is common talking points (which country hold the largest percentage of American debt).

In the latest update, the Pew Research Center found that only 29% of Americans knew that the government spends the most on Medicare. Last year only 34% knew that the Troubled Asset Relief Program, otherwise known as the bailout, was enacted during the Bush Administration. That same year only 26% knew that it takes 60 votes in the Senate to break a filibuster. How do you have a more informed public? By participating in the conversation. Each week PolitiGeek will breakdown a different piece of public policy.

Center for Budget and Policy Priorities breaks down the differences between deficits, debt, and interest:

Deficits

For any given year, the federal budget deficit is the amount of money the federal government spends (also known as outlays) minus the amount of money it takes in (also known as revenues). If the government takes in more money than it spends in a given year, the result is a surplus rather than a deficit.

When the economy is weak, people’s incomes decline, so the government collects less in tax revenues. This is one reason why the deficit often grows during recessions. Conversely, when the economy is strong and tax revenues increase, the budget deficit shrinks.

Debt

Unlike the deficit, which drives the amount of money the government has to borrow in any single year, the national debt is the cumulative amount of money the government has had to borrow throughout our nation’s history. Each time the government runs a deficit, it increases the national debt; each time the government runs a surplus, it shrinks the debt.

Interest

Interest, the fee a lender charges a borrower for the use of the lender’s money, is the true cost of government borrowing. This cost is considerable. In 2008 the federal government paid roughly $250 billion in interest payments, or roughly the amount that it spent on education, transportation, and veterans’ programs combined.

Interest costs reflect both the amount of money borrowed (also known as the principal) and the interest rate. When interest rates go up or down, interest costs do too, making the national debt a bigger or smaller drain on the budget.

Every dollar the government spends on interest payments is a dollar that is unavailable for programs that currently benefit taxpayers. Rather, interest is what we pay now for benefits received in the past. Adding to the national debt by running up deficits essentially shifts the costs of current programs on to future generations, who will have to pay the interest costs.

Michael Linden, Director for Tax and Budget Policy at the Center for American Progress, explains why the United States is running such high deficits:

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