Primary Deficit, Total Deficit, and Debt
The meaning of "deficit" differs from that of "debt", which is an accumulation of yearly deficits. Deficits occur when a government's expenditures exceed the revenue that it generates. The deficit can be measured with or without including the interest payments on the debt as expenditures.
The primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments. The total deficit (which is often called the fiscal deficit or just the 'deficit') is the primary deficit plus interest payments on the debt.
Therefore, if is a timeframe, is government spending and is tax revenue for the respective timeframe, then the primary deficit is
If is last year's debt, and is the interest rate, then the total deficit is
Finally, this year's debt can be calculated from last year's debt and this year's total deficit, as follows:
Economic trends can influence the growth or shrinkage of fiscal deficits in several ways. Increased levels of economic activity generally lead to higher tax revenues, while government expenditures often increase during economic downturns because of higher outlays for social insurance programs such as unemployment benefits. Changes in tax rates, tax enforcement policies, levels of social benefits, and other government policy decisions can also have major effects on public debt. For some countries, such as Norway, Russia, and members of the Organization of Petroleum Exporting Countries (OPEC), oil and gas receipts play a major role in public finances.
Inflation reduces the real value of accumulated debt. If investors anticipate future inflation, however, they will demand higher interest rates on government debt, making public borrowing more expensive.
Read more about this topic: Government Budget Balance
Famous quotes containing the words primary, total and/or debt:
“It was the feeling of a passenger on an ocean steamer whose mind will not give him rest until he has been in the engine-room and talked with the engineer. She wanted to see with her own eyes the action of primary forces; to touch with her own eyes the action of primary forces; to touch with her own hand the massive machinery of society; to measure with her own mind the capacity of the motive power. She was bent upon getting to the heart of the great American mystery of democracy and government.”
—Henry Brooks Adams (1838–1918)
“The word infant derives from Latin words meaning “not yet speaking.” It emphasizes what the child cannot do and reflects the baby’s total dependence on adults. The word toddler, however, demonstrates our change in perspective, for it focuses on the child’s increased mobility and burgeoning independence.”
—Lawrence Kutner (20th century)
“Even the poor student studies and is taught only political economy, while that economy of living which is synonymous with philosophy is not even sincerely professed in our colleges. The consequence is, that while he is reading Adam Smith, Ricardo, and Say, he runs his father in debt irretrievably.”
—Henry David Thoreau (1817–1862)