Primary deficit

The primary deficit is the difference between the current expenses of a State and its collection of  taxes . That is, it collects expenses less public revenues without counting interest payments on public debt .

The utility of the primary deficit is that it collects payments and collections over which the government has control. The government can vary its level of spending and the taxes it collects through its fiscal policy . Therefore, the payment of interest on the debt is not included in the primary deficit, since they do not depend on the government’s performance during the period, but are previously committed. When interest is included in the deficit we talk about fiscal deficit .

The primary deficit is important when calculating the sustainability of public debt. If a government reaps primary deficits year after year, it must borrow to maintain its expenses. On the other hand, if a government obtains a primary surplus (collection> expenses), it will generate resources with which it can pay the interest on the debt.

Example of primary deficit use

If a government collects $ 100 in taxes and spends $ 120 on paying officials and their policies, the primary deficit will be $ 20 ($ 120 – $ 100). The $ 20 deficit must be financed by issuing currency or debt.

If a state incurs primary deficits continuously and finances them by issuing debt, its proportion of debt over GDP will tend to rise. In the long term this is unsustainable.

On the other hand, if the government raises $ 100 but spends only $ 90, the primary surplus of $ 10 may be used to pay interest, thus tending to reduce its debt to GDP ratio. In this way the public debt becomes more sustainable.

Leave a Comment