Primary-Total Deficit
March 23, 2009
Overview
Primary, total or simply ‘deficit’ means interest payments less budget deficit of a country in a given period of time. It is the difference between the current net government spending and the sum value of the current revenue collections from all sources. In other words, it is the total sum of government spending, added to the interest payments on a debt and less the tax revenues. Note that a government’s primary deficit can be calculated, with or without the interest it pays on whatever debts it has.
Therefore, Primary deficit equals to Fiscal deficit minus Interest Payment i.e.
Fiscal Deficit – Interest Payment = Primary/Total deficit. Before calculating the primary deficit, the value of fiscal payment should be established. Note that the sum value of the primary budget added to the interest payments is equal fiscal deficit. Of equal importance to note also is that primary deficit goes hand in hand with the net borrowing, whereby the deficit is expected to meet the expenditure when the interest payment is excluded.
Causes of a budget ‘deficit’
When the government spends more money than it receives, it results in a budget deficit. Contrariwise, when a government spends less money than it generates or receives, it results in a budget surplus. Essentially, a debt is an accumulated flow of deficits over an extended period of time. It is therefore right to say that a deficit is the flow whereas the debt acts as the stock.
An extended accumulation of a deficit for a very long period of time is termed as the government debt, which is payable back through borrowing of finances from citizens and overseas countries. By the same token, a government debt may be offset by printing new currency; this is irrespective of the fact that the government’s debt is subjugated in its own currency.
Equally, the government with a debt can sell property to offset the bill; however, ‘over selling’ of property may lead to asset deflation. A lot of governments offset their debts through the issuance of short term note bills or long term government bonds, whereby the government will end up auctioning the bonds. Be advised though that if debts are monetized on a large scale, it leads to rapid inflation.
Like any other loan, a government is expected to pay back the amount they have borrowed together with an interest. But generally, the government debt will decrease when its collected revenue exceeds its current expenditure and the incurred interest costs.
Effect of economic activities on fiscal deficits
When a government’s production, the Gross Domestic Product drops down below its potential production, economic activities can be stimulated by running a fiscal deficit and rising the government debt. As a result of the government running close to, or exactly at its potential of output, fiscal deficits end up causing inflation.
On the other hand, the expansion or shrinkage of fiscal deficits is also influenced by economic activities. Enhanced levels of economic trends translates to higher tax revenues, government expenditure similarly increase on declining economic trends because of higher expends for social insurance plans such as unemployment and retirement benefits.
The public debt is equally affected on alterations in tax enforcement policies, tax rates and changes in social benefits. Generally, inflation will reduce the real value of the debt accumulated, but again typically, when investors anticipate future inflation, the demand for interest rates on the government debt will be higher, thus making public borrowing even more costly.
In conclusion, a high fiscal deficit means an escalated level of government borrowing, hence reduces availability of capital, lowers liquidity and increases higher rates and higher inflation, and when it is calculated, the difference is the primary or total deficit.
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