Understanding Primary Deficit
"Deficit" refers to when a government's spending surpasses its yearly revenue. In contrast, "debt" is the accumulation of these deficits annually. Hence, deficit is the excess of expenses over income, not considering interest payments on any debt.
Primary deficit is the difference between the government's total annual spending and revenue from all taxes. It varies from the total or fiscal deficit, which includes the value of interest payments on any debt along with the primary deficit.
The primary deficit is the fiscal deficit of the present year minus the interest paid on previous year's borrowings. Decreasing the primary deficit is a sign of fiscal health.
Primary Deficit Formula
Assume that for a government, the timeframe is t, the total spending (gross fiscal deficit) is G, and Interest Payment is T. The primary deficit is then (G – T) within timeframe t.
See the formula below for the Primary deficit:
Primary Deficit = Gross Fiscal Deficit - Interest Payments = G - T
The terms signify:
Primary Deficit is the total government spending.
Gross Fiscal Deficit is total expenses minus all receipts (excluding borrowings).
Interest Payments (excluding the interest paid on the debt).
The primary deficit represents the borrowings of a government, excluding the interest rate. It also defines the government's total expenses in a year, except the interest paid on those borrowings.