Primary Deficit indicates the borrowing requirements of the government, excluding interest. It is the amount by which the total expenditure of a government exceeds the total income. Note that primary deficit does not include the interest payments made. Also, primary deficit shows the borrowing requirements needed for meeting the expenditure of the government.
Primary Deficit is the difference between the current year’s fiscal deficit (total income – total expenditure of the government) and the interest paid on the borrowings of the previous year.
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.
The total government expenditure constitutes of (the need for government borrowings) as follows:
- Purchase of goods and services for public consumption
- Public investment
- Income transfer payments (pensions, social benefits)
- Capital transfer payments
- National defence
- Health and welfare benefits
Primary Deficit Formula: How is Primary Deficit Calculated
Primary Deficit = Fiscal Deficit (Total expenditure – Total income of the government) – Interest payments (of previous borrowings)
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.
You can also calculate primary deficit using the formula: Fiscal deficit – Interest payments made.
What does Primary Deficit indicate?
Primary deficit is measured to know the amount of borrowing that the government can utilize, excluding the interest payments.
Can the Primary Deficit be negative?
A decrease in primary deficit shows progress towards fiscal health. The deficit is also mentioned as a percentage of GDP. It is needed to get a proper perspective and facilitate comparison.
Note that the difference between the primary deficit and fiscal deficit reflects the amount of interest payment on public debt generated in the past.
Zero Primary Deficit
Hence, 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.