Explain the relation between government deficit and government debt.
Budgetary deficits must be financed by taxation, printing money, or borrowing. Governments have mostly relied on borrowing, giving rise to government debt. Thus, the concepts of deficits and debt are closely related.
Deficit can be thought of as a flow which adds to the stock of debt. If the government continues to borrow year after year, it leads to the accumulation of debt. Consequently, the government has to pay more and more by way of interest.
These interest payments themselves contribute to the debt. This implies that a persistent deficit leads to a build-up of the stock of debt and interest liabilities.
Explanation
The answer is derived directly from the first paragraph of the provided context which explicitly defines the relationship. It highlights that deficits are a flow variable that adds to the stock variable of debt. It also incorporates the compounding effect mentioned in the text where interest payments on accumulated debt further contribute to the debt burden.