Deficit vs debt
These two terms are frequently confused. The deficit is the annual shortfall — the flow of new borrowing in a given year. The national debt (or public debt) is the accumulated stock of all past deficits (minus surpluses), the total outstanding amount the government owes. If the UK runs a £100bn deficit this year, the national debt rises by £100bn. If it runs a surplus next year, the debt falls. Most countries have run deficits far more often than surpluses since the Second World War, so national debts have generally grown in nominal terms.
Why governments run deficits
Governments typically run deficits because spending on public services (health, education, defence, pensions, infrastructure) is politically difficult to cut and often counter-cyclical — spending automatically rises during recessions (unemployment benefits, stimulus) while tax revenues fall (lower incomes, lower profits). The Keynesian case for deficit spending is that during economic downturns, the government should borrow and spend to support demand when the private sector is retrenching. The 2008–2009 and 2020–2021 fiscal responses were both examples of very large deliberate deficit spending to prevent deeper recessions.
Does it matter?
The answer is nuanced. Countries that borrow in their own currency and have credible central banks (US, UK, Japan) can sustain higher debt levels than those that cannot (Greece in 2010, Argentina repeatedly). What matters is: the debt service cost (interest payments as a share of revenues — rising as rates rose post-2022); the trajectory (is debt stabilising or still growing?); and market confidence. Japan has run debt above 200% of GDP for decades without a crisis. But the UK’s brief 2022 "mini-budget" experiment showed how quickly market confidence can evaporate if deficits appear unfunded and unsustainable.
“We don’t have a debt crisis. We have a path dependency problem: every deficit today makes the next decision harder.”
What this means for you
Government deficits affect you through multiple channels: interest rates (governments competing for bond investors can push up borrowing costs); inflation (deficit-funded spending can be inflationary); taxes (eventually higher taxes or spending cuts to service debt); and public service quality (rising interest bills leave less for healthcare, education, and infrastructure). Understanding deficits helps you interpret budget announcements, central bank decisions, and bond market moves — all of which ultimately filter into mortgage rates, savings rates, and economic growth that affects jobs and wages.