Fiscal, revenue, trade and current account deficits are widely discussed terms and most know a thing or two about them. However, economics doesn’t limit the scope of deficits to just these terms. Other than them, primary deficit is also used widely despite it being of recent origin. Primary deficit is also widely mentioned in the budget documents.
What is Primary Deficit?
Gross Primary Deficit is Gross Fiscal Deficit less interest payments.
Net Primary Deficit is Net Fiscal Deficit minus net interest payments.
Net interest payment is interest paid minus interest receipt.
Symbolically:
Primary deficit = Fiscal deficit – Interest payments on the earlier borrowings
Primary deficit= Total revenue – Total expenditure excluding interest payments on its debt
Normally, when the government raises a loan, it includes the interest amount. When that amount is deducted from the principal loan amount, that is the primary deficit. In simpler terms, the government’s borrowings excluding the interest payment is the primary deficit.
By excluding debt service, the primary deficit highlights the underlying structural imbalance between the amount of money that the government brings in each year (mostly through taxes) and how much it costs to provide government goods and services.
What is the difference between Primary Deficit and Fiscal Deficit?
Primary Deficit is the difference between fiscal deficit and interest payments. To calculate Primary Deficit, you also need the help of fiscal deficit. Fiscal deficit is the difference between the total expenditure of the government and its total income.
What does a Zero Primary Deficit indicates?
When the primary deficit is zero, the fiscal deficit becomes equal to the interest payment. This means that the government has resorted to borrowings just to pay off the interest payments. Further, nothing is added to the existing loan.
How Primary deficit affects economy?
If primary deficit of a country is shrinking it means fiscal health of the economy is improving. A shrinking primary deficit points towards better scope of an economy in the days ahead. In the budget document, primary deficit is mentioned in terms of percentage of gross domestic product (GDP). It is generally done to help in carrying out comparison and also get a proper perspective. Any government that doesn’t borrow to consume is considered to be prudent in fiscal management.
Many analysts and economists point out that when the primary deficit is small and interest rates are lower than the growth rate of nominal GDP, the debt-to-GDP ratio will fall.
If the government cannot closely align its revenues and expenditures, the national debt can rise at an unsustainable rate and could jeopardize the country’s economic future.
