Question

Differentiate between Fiscal Deficit and Primary Deficit.

Hint:

Think of it this way: Fiscal Deficit is the total new debt you take on this year. Primary Deficit is the new debt you take on for new spending, after setting aside the money needed just to pay the interest on your old credit card bills.

Answer 1

Step 1: Understanding the Concepts:
Both Fiscal Deficit and Primary Deficit are important measures of a government's budget imbalance. Fiscal deficit shows the total borrowing need, while primary deficit isolates the borrowing need for current year's expenses.

Step 2: Differentiation Table:
The key differences between Fiscal Deficit and Primary Deficit are as follows:\[\begin{array}{|c|c|c|} \hline Basis of Difference & Fiscal Deficit & Primary Deficit \\ \hline \text{Meaning} & \text{It is the excess of the government's total expenditure over its total receipts, excluding borrowings.} & \text{It is the fiscal deficit of the current year minus the interest payments on the borrowings of previous years.} \\ \hline \hline \text{Formula} & \text{Total Expenditure – Total Receipts (excluding borrowings)} & \text{Fiscal Deficit – Interest Payments} \\ \hline \hline \text{What it Indicates} & \text{It indicates the total borrowing requirement of the government from all sources during the fiscal year.} & \text{It indicates the borrowing requirement of the government to meet its expenses, excluding the interest payments on past debt.} \\ \hline \hline \text{Focus} & \text{It shows the overall gap in the government's finances, including the burden of past debt.} & \text{It highlights the deficit in the current year's fiscal operations, ignoring the inherited liability of interest payments.} \\ \hline \hline \text{Magnitude} & \text{It is always greater than the Primary Deficit (unless interest payments are zero).} & \text{It is always smaller than the Fiscal Deficit. A zero primary deficit means the government is only borrowing to pay off past interest.} \\ \hline \end{array}\]

Step 3: Final Answer:
The main difference is that Fiscal Deficit represents the total borrowing needed by the government, while Primary Deficit shows the portion of that borrowing that is not being used to pay interest on old loans, thus reflecting the current government's fiscal discipline.