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The fiscal deficit is the gap between expenses and earnings. For the fiscal year 2020-21, India's debt to GDP ratio was 59.3%; and the fiscal deficit was 9.2% of GDP.

How come debt is larger than the fiscal deficit, especially since both values are expressed in terms of proportion of GDP?

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2 Answers 2

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Because debt to GDP is measured as total debt country has divided by GDP, which is done to compare the debt to the size of economy ($D/GDP$)

Fiscal deficit is a negative difference between tax revenue and expense country has in a given year ($T-G$).

Even if you divide fiscal deficit by GDP ($(T-G)/GDP$) there is no reason for them to be similar.

Fiscal deficit is a deficit for particular year. Total debt is sum of all fiscal deficits a country had over multiple years. In fact $D=\sum (T_t-G_t)$ for every year that $T<G$.

So there is no reason why they should be close. Especially if a country accumulated a lot of debt over past decades it will be very improbable current deficit will manage to get so big it will be similar to all past debt that country accumulated.

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    $\begingroup$ Good morning! I can't seem to parse your first sentence, will you please take a look at it and see if you mistyped something? $\endgroup$
    – Giskard
    Feb 13 at 9:02
  • $\begingroup$ @Giskard I edit it is it clearer? $\endgroup$
    – 1muflon1
    Feb 13 at 9:06
  • $\begingroup$ I think a few articles are still missing, but yes, I get it now. $\endgroup$
    – Giskard
    Feb 13 at 9:07
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Just because two things are expressed as a proportion of the GDP, they can be very different, e.g., I can express my salary in terms of my country's GDP, but clearly this is different from the debt to GDP ratio.

Deficit vs. debt

If I make less money in a month than I spend, I have a deficit for that month. This does not necessarily mean that I will be in debt - perhaps I had savings to rely on. The opposite is also possible: perhaps I had a surplus this month, and I used it to pay part of a debt that I owe.

Countries are not people, but the logic is pretty much the same. Current debt is kind of like the future value of past deficit/surplus cashflows.

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