Primary surplus

economic-dictionary

The primary surplus is the difference between the current expenses of a State and its tax collection. If the expenses are lower than the public income (not counting the interest payments on the public debt) we will have a primary surplus. Otherwise, there will be a primary deficit.

The utility of the deficit and the primary surplus is that it collects the payments and collections over which the Government has control. The government can vary its level of spending and the taxes it collects through its fiscal policy. For this reason, the payment of interest on the debt is not included in the primary deficit or surplus, since they do not depend on the actions of the Government in the period, but are previously committed. When interest is included, we speak of a fiscal surplus, so it will be closer to becoming a fiscal deficit.

The primary surplus is important when calculating the sustainability of public debt. If a government reaps primary deficits (expenditures> collection) year after year, it will have to go into debt to maintain being able to meet its expenses. On the other hand, if a government obtains a primary surplus (collection> expenses) it will generate resources with which it will be able to pay the interest on the debt.

Example of the use of primary surplus

If a government collects $ 120 in taxes and spends $ 100 on paying officials and on their policies, the primary surplus will be $ 20 ($ 120 - $ 100). The $ 20 surplus can be used either to save or to invest in the public sector.

If a State continuously incurs primary deficits and finances them by issuing debt, its ratio of debt to Gross Domestic Product (GDP) will tend to rise. In the long term this is unsustainable.

On the other hand, if the Government has a primary surplus, as in the example, it can use it to pay interest, thus tending to reduce its debt-to-GDP ratio. In this way, public debt becomes more sustainable.

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