Principles of Macroeconomics / Unit 14 MAC 1303 worked example, 60 to 90 seconds
Computing Deficits and the Debt
The idea
Given a run of years, compute each year's balance and the debt at the end. Take the deficits and surpluses one year at a time and carry the debt forward, adding a deficit and subtracting a surplus. The debt is the running total; the deficit is never the total.
In practice
Start with a debt of 500 billion. Year one runs a deficit of 120, so the debt becomes 620. Year two runs a deficit of 90, so the debt becomes 710. Year three runs a deficit of 40, so the debt becomes 750. Year four runs a surplus of 30, so the debt falls to 720. Now read the pattern: the deficit shrank from 120 to 90 to 40 across three years, and the debt rose in every one of them. Only in the fourth year, when the balance turned positive, did the debt fall.
Where people slip
A shrinking deficit is often reported as the debt improving, and those are different claims. The debt kept rising through all three years of falling deficits here. Ask which quantity a statement is about before judging it, because a government can honestly announce a smaller deficit while its debt reaches a record.
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