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
Its very sensible to look at fiscal deficit as % of GDP for couple of reasons. First of all, public debt is looked at as % of GDP, because GDP is what forms the basis paying it back. Secondly, growth rate of GDP determines how high fiscal deficit is sustainable and how much inflation it will cause. If your economy can outgrow your debts, then your debts are not a problem. And thirdly, fiscal deficit is just one alternative way to pay for government spending. The main one being taxation. In any case, economy of the country has to pay for spending of the government so looking at government spending as % of GDP makes a lot of sense.
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