A balanced budget occurs when a government's expenditures equal its revenues, resulting in no budget deficit or surplus. However, in practice, many governments experience budget deficits due to various factors such as economic downturns, increased public spending, or tax cuts. A sustainable budget deficit is one that can be financed without compromising long-term fiscal stability, typically defined as a deficit that does not exceed 3% of GDP.
The debt-to-GDP ratio measures the total public debt as a percentage of a country's gross domestic product. A high debt-to-GDP ratio can indicate potential fiscal instability, as it may require significant future tax increases or spending cuts to service the debt. Conversely, a low debt-to-GDP ratio suggests that a country has a strong fiscal position.
The primary surplus or deficit focuses on the government's core revenues and expenditures, excluding interest payments on the debt and temporary factors such as one-time payments or tax cuts. A primary surplus indicates that a government is generating more revenue than it spends on current operations, while a primary deficit suggests the opposite.
Maintaining fiscal stability is essential for several reasons. It helps to anchor long-term interest rates, which in turn influences borrowing costs for businesses and households. Fiscal stability also contributes to economic growth by providing a predictable environment for investment and consumption. Additionally, it helps to manage inflation by ensuring that government spending does not outpace revenue growth.
To achieve fiscal stability, governments often implement various policies, such as adjusting tax rates, controlling public spending, and managing public debt. International organizations and financial institutions, such as the International Monetary Fund (IMF) and the European Union, provide guidelines and support to help countries maintain fiscal stability.