I was recently reading news on India’s interim budget and I read something that by 2025 they (the country) expect fiscal deficit to be x% of GDP, and it had me confused.
How is GDP, which a metric for production and exports imports within a country, an appropriate base for fiscal deficit?
In: Economics
Imagine you have a $10,000 debt on your credit card and no money in your bank account. If you make 5 million a year, no problem. You’ll get your next paycheck and easily pay off the balance. Now imagine you make $30,000 a year. You’re in trouble. You’ll only be able to pay off a small amount of the balance at a time and the interest rate may be such that you’ll never be able to get out from under that debt.
Now picture the same thing but with a country. A big country can take on a large amount of debt and it’s not a huge cause for concern because it has a large economy and it’s treasury collects lots of tax revenue every year. The US has something like 30 trillion in debt. That’s not good but it’s also not effecting our credit rate significantly because we have the ability to collect revenue. If a smaller country, say France had that much debt, it would be an absolute crisis and the government would probably be insolvent because France doesn’t have the economic means maintain that debt.
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