What is the Primary Balance? And Why is it So Important?

Since Barbados entered into a programme with the International Monetary Fund (IMF), there has been a lot of discussion about the primary balance:

“Expenditure restraint and gains in tax revenue enabled government to register a primary balance equivalent to 3.5% of GDP.” – Central Bank of Barbados Review of the Economy January-March 2019.

“Government has targeted a primary balance of 6% of GDP for fiscal year (FY) 2019/2020, building on the 3.5% of GDP it achieved for FY 2018/2019.” – Central Bank of Barbados Review of the Economy January-June 2019.

“The targeted primary balance of 6% of GDP on a full fiscal year basis remains essential to the continued effort to maintain macroeconomic stability.” Central Bank of Barbados Review of the Economy January-September 2019.

But what is the primary balance, and what’s so important about it?

A Measure of How Well We Manage our Money

The primary balance is the difference between Government’s revenue (what it is earning) and its non-interest expenditure (what it is spending, not including debt payments). This difference can be measured as a percentage of GDP or Gross Domestic Product. GDP is the total value of all the goods and services a country produces.

To put that differently, your “primary balance” would be the difference between your monthly salary and your monthly expenses, not including the money you spend repaying your debts, e.g. your mortgage or car loan. But rather than focus on the dollar value, you can calculate the primary balance ratio as a percentage of your total income.

When the primary balance is positive, that is, when revenue is more than non-interest expenditure, that can also be referred to as a primary surplus.

An Indication of How Much Breathing Room You Have

One of the targets of Barbados’ adjustment programme is that we achieve a primary balance of 6% of GDP.

Achieving and maintaining a primary balance of 6% of GDP requires careful management of our spending as well as seeking to increase revenue.

Why do we want such a large surplus? It allows us to service our debt and to lower our debt level. Given the existing stock of debt, we need a substantial surplus to achieve this. Reordering our spending and reducing our debt will create what economists call fiscal space, which ultimately can be used to finance projects that will stimulate the economy.

The same could apply to your personal finances. To get financial assistance from a bank, it might set certain conditions for you. To meet those targets, you might need to spend less. You still have to pay your mortgage and car loan, so you might cut back on how much you spend on groceries, how much credit you put on your phone, or how often you go out partying. You might also try to get a side-job so you can earn more. All of this might be a challenge, but it will help you meet the terms of your agreement.

Similarly, reaching the targeted primary balance is challenging but, by doing it, Barbados will continue to receive the IMF’s assistance during our recovery efforts and help to restore investor confidence. Moreover, the discipline it will teach us can help us to maintain our economic recovery in the long run.

And that is why the primary balance matters.