Which of the following is a correct measure to reduce primary deficit in the government budget?

Both 1 and 2

The correct answer is option 3: Both 1 and 2

Primary deficit = Fiscal deficit – Interest payments

Primary Deficit is the difference between the current year’s fiscal deficit (total income – total expenditure of the government) and the interest paid on the borrowings of the previous year. Once calculated, the primary deficit reflects the amount the Government needs to borrow to meet its current year’s expenses.

A primary deficit can occur when a government spends more than it earns from taxes and other sources, excluding interest payments on debt. This can lead to an increase in overall debt and interest payments, which can negatively impact the economy’s stability. The primary deficit shows how interest payments strain the Government’s revenue. By comparing the fiscal deficit and primary deficit, you can find out the interest payments that the Government is paying on its past borrowings.

There are ways in which the Government can correct a primary deficit in its accounts. These ways are as follows –

1. Reducing the Expenses: If the Government reduces its expenditure, it can automatically reduce the fiscal deficit. As the fiscal deficit is reduced, it brings down the primary deficit too.

2. Increasing the Revenue: Alternatively, if the Government increases its revenue, the fiscal deficit falls. This also causes the primary deficit to fall as the Government gets sufficient funds to meet its expenses without having to borrow. As borrowings are reduced, the interest payment on the same is also reduced, and the primary deficit can be corrected.