First of all, what is the fiscal balance? In case you are not familiar with the term, it is simply an accounting term referring to the relationship between a country’s gross domestic product and its debt. How can we define this so that you can understand how important it is to keep track of one’s national debt? A country’s gross domestic product, or G.D.P., is basically the economic value of all of the products that the country produces in a given time period. Now, if a country’s G.D.P. increases, then that means that it will be producing more goods and services, which mean that the country will have more income and thus, more money to spend. The more money spent, in turn, leads to more production, which, of course, means more G.D.P.
That’s the basic explanation of what is fiscal balance; it is an accounting principle used to measure how well a country’s debt and its surplus (the difference between the G.D.P. and the country’s debt). The higher the debt-to-G.D.P., the higher the country’s debt-to-income ratio, or the amount of money being spent as opposed to the amount being produced.
But there’s more to what is fiscal balance than that. The balance of payments is actually a long series of balances that represent all of a country’s transactions with other countries. For example, the U.S. balance of payments is actually a series of balance of payments between the U.S. and other countries. In fact, every trade transaction that occurs in the U.S., from investments to purchases and to sales, is technically a “trade” in the economy. So what is the fiscal balance?
Now, the question might pop up in your mind now: how does the country’s balance of payments actually come into being? And what are the factors that contribute to the creation of a country’s fiscal balance? To better understand what is fiscal balance, it helps to know some of the factors that affect it. These include:
Deficits. A deficit is an outgoing payment that a country has to make to another country. Usually, the latter pays the former for the latter’s goods or services. When a country has a deficit, it means that the latter has to borrow money in order to finance the same. It could be done by creating new assets, or by issuing new bonds. But the main purpose of a deficit remains to ensure that the country can continue to make payments to its creditors, especially to its foreign creditors.
surpluses. When a country has surpluses, it is the opposite of deficits. A surplus is the opposite of a deficit because the latter is a direct outflow of cash from a country’s budget. Surpluses, on the other hand, are excess funds that a country earns after all expenses have been covered. The term “surplus” is also used in case of the economy as a whole, and not just in case of a specific fiscal balance.
Interest rates. Interest rates also affect what is fiscal balance. When a country has low interest rates, its surplus becomes bigger than its deficit. On the other hand, when the country’s interest rates are too high, a deficit results because more money is borrowed to pay the interest, leading to larger surpluses than savings.
Government spending and debt. This topic goes deep enough that it deserves a separate article. Basically, a country’s fiscal balance is determined by its total government spending, including what it spends on its own borrowing (such as interest payments) and its borrowing from external sources such as the International Monetary Fund. All of this spending, plus the total of all government receipts, add up to the country’s fiscal balance. In short, what is the fiscal balance is a question that may vary depending on the situation.