Primary Deficit explained

23 03 2009

King Banaian has a great explanation of the debt and deficit implications of the current range of stimulus and rescue injections the U.S. gov’t is making.

Managing debt to GDP post the econopocalypse will likely be harder than we think.   Banaian notes that the real way to understand the entire situation is to understand the concept of “primary deficit”:

Suppose you are paying on a credit card you’ve decided not to use any more. They are charging you high interest. You have to pay off at least all of the interest each month, plus some of the principal, for you to make any progress towards paying that debt off. Likewise, if the government wants to make any progress towards paying off its debt, it must collect enough in taxes, or cut spending enough, to not have to borrow all of what it needs to pay the interest on the debt. Now, it can hope to have an easier time paying back the debt because the economy grows, and it will if GDP growth should exceed the real interest rate it has to pay on the debt. But each year we add to the debt it gets a little harder. And doubling the debt-to-GDP ratio in ten years, with a forecast for real interest rates near 3% in their figures, that’s quite hard to do.

Things have already changed, but Canada has had the lowest debt to GDP ratio in the G7 since 2004.  Canada was on track to eliminate total government net debt by 2021.   These are 2008 numbers, so brace yourself for the next set!

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