CDS (II) 2023 General Knowledge · Question 64 of 120

Correct — C, Interest payments. Primary deficit is defined as the fiscal deficit minus interest payments, and the definition exists to answer one question: how much is the government borrowing this year for reasons other than servicing what it borrowed in the past? The fiscal deficit measures total borrowing, which includes the interest bill inherited from every earlier deficit. Strip that inherited charge out and what remains is the fresh imbalance created by this year's decisions. That is why a country can run a fiscal deficit and still have a primary surplus — its current spending is covered, and the whole of the gap is old interest. Defence spending, subsidies and pensions are all ordinary items of expenditure that sit inside the fiscal deficit and are not deducted; only interest payments are.

• (a)Defence expenditure — A large item of revenue and capital spending, but an ordinary one. Nothing in the deficit definitions singles it out, and removing it would not tell you anything about the burden of past borrowing.
• (b)Expenditure on subsidies — Subsidies are revenue expenditure and are part of the revenue deficit as well as the fiscal deficit. They are a policy choice of the current year, which is exactly what the primary deficit is designed to keep in view rather than remove.
• (d)Pension — Pensions are committed revenue expenditure, and like interest they are hard to cut in the short run — which makes this a plausible-sounding choice. But the definition names interest payments alone, because only interest is the direct cost of past deficits.

Government budgets are read through a small family of deficits, each removing something from the one before. Revenue deficit is revenue expenditure minus revenue receipts. Fiscal deficit is total expenditure minus total receipts other than borrowing, and it therefore equals the government's total borrowing requirement for the year. Effective revenue deficit takes out grants for creation of capital assets. Primary deficit is the fiscal deficit less interest payments, and it isolates the current year's own imbalance.

The reasoning to reach for is what each measure is trying to reveal, not the formula. Interest payments are the one expenditure the government has no discretion over in the current year — they are the price of decisions taken in earlier years. Removing them therefore answers a specific question about present fiscal discipline. Defence, subsidies and pensions are all discretionary in principle and all belong to the present, so removing any of them would make the resulting number meaningless. A useful corollary is that a falling primary deficit alongside a stubborn fiscal deficit is the signature of a government whose current accounts are improving while the debt stock keeps generating interest.

• Primary deficit equals fiscal deficit minus interest payments.
• Fiscal deficit equals total expenditure minus total receipts excluding borrowings, and is therefore the total borrowing requirement.
• Revenue deficit equals revenue expenditure minus revenue receipts.
• A zero primary deficit means the government is borrowing only to meet interest on past debt.
• The Fiscal Responsibility and Budget Management framework sets targets for the fiscal deficit and the revenue deficit and requires disclosure of the others.

• Subtracting interest receipts instead of interest payments — the deduction is on the expenditure side.
• Assuming primary deficit is always smaller in absolute size than revenue deficit; the two measure different things and either can be larger.
• Treating pensions and subsidies as committed charges that must be removed. Only interest payments are removed.

Either as a definition question like this one, or as a short numerical asking for the primary deficit given a fiscal deficit and an interest bill.

• practice — not a real PYQ

  If a government's fiscal deficit is 6 per cent of GDP and its interest payments are 4 per cent of GDP, its primary deficit is

  • (a)10 per cent of GDP
  • (b)6 per cent of GDP
  • (c)4 per cent of GDP
  • (d)2 per cent of GDP

  Answer(d) 2 per cent of GDP — primary deficit is the fiscal deficit less interest payments, so 6 minus 4.

• practice — not a real PYQ

  A government that has a fiscal deficit but a zero primary deficit is borrowing

  • (a)to finance new capital projects only
  • (b)only to meet interest payments on past debt
  • (c)to finance subsidies only
  • (d)nothing at all

  Answer(b) only to meet interest payments on past debt — the whole of the current borrowing is accounted for by the inherited interest bill.