– why is fiscal deficit mentioned as a % of GDP (gross domestic product) ?

Question

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

Answer 1

GDP is the total amount of stuff that a country can create in a year. It is a reasonable proxy for the total value that has the potential to be taxed; countries don’t really have “income” or “assets” like an individual does, so we need some metric to assess what the reasonable tax base is. GDP is a decent metric for that; it is _loosely_ what a country’s “income” is.

So debt to GDP is a similar metric to debt to income ratios for individuals – how much debt do you have vs. how much value are you producing every year. That gives you a good sense of how capable a country is of servicing its debts.