Primary deficit is referred to as the difference that exists between the fiscal deficit of the current year and the interest payment that was needed to be paid in the previous fiscal year. It is one of the three important measures of determining the government deficit.
It shows the requirement of borrowing of the government and excludes any kind of interest. It also highlights the amount of government expenses that needs to be met through borrowing other than the interest payment.
While fiscal deficit deals with the government’s total borrowings including the interest payment, primary deficit deals with the government’s borrowings excluding the interest payments.
Generally, when a loan is raised by the government it includes the interest payment amount also. This amount when subtracted from the principal loan amount indicates the primary deficit.
Calculation of primary deficit is represented by the following formula
Primary deficit = Fiscal deficit – Interest payments
Fiscal deficit = (Total expenditure – Total income of the government)
Interest payments refer to the previous year’s pending payments
A decrease in the primary deficit reflects the improvement in the fiscal health of the economy, when the primary deficit becomes zero, it suggests that the government only needs to borrow only to pay off the interest payments due from the previous year.
This concludes our article on the topic of Primary Deficit, which is an important topic in Economics for Commerce students. For more such interesting articles, stay tuned to BYJU’S.