Austerity for Dummies Part 5 – The difference between the deficit and debt – FYI @George_Osborne @David_Cameron #LongTermEconomicPlan

Osborne deficit

This is a rewrite of an explanation I read on the “Another Angry Voice” blog, although I don’t like the driving analogy used. I prefer to explain it in more traditional terms.

Imagine you are running a business that has a gross turnover of £100,000 and your entire costs, including wages and tax, are equal to £100,000, this would leave you with a net profit of zero but no deficit and no surplus.

If your turnover remains the same, but your total costs are £90,000, then you will be making a profit and, hence, a surplus.

If your total costs are £110,000, then you have a deficit. For your business to keep running  you might need to borrow money, and this accumulates as a debt. Not the same thing as a deficit.

If that deficit is the cost of buying new equipment as an investment (as a temporary debt), it does not mean that your business is not viable, even if it is running a deficit in the short term. Once the equipment is paid for, and starts to earn money from additional business, it is hoped that the increased income will pay off the debt out of your income surplus.

Conversely, if your business sells an asset, this might produce a short term surplus, but that does not mean that the surplus will continue, or that the business is viable.

The operating deficit of a business is not necessarily related to its debts, although it can be, but one thing is certain, the two things are not the same.


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