You are given the following budget data for a country that has both a central go

Question

You are given the following budget data for a country that has both a central government and local governments.

Central tax receipts of $450; local tax receipts of $100; central transfer payments of $100; local transfer payments of $50; central purchase of goods and services of $200; local purchases of goods and services of $150; grants in aid (central to local) of $100; central government debt of $1,000 in government bonds and local governments hold $200 of these government bonds; local government debt of $0, nominal interest rate in the market is 5%; interest received from private sector by central government is $10; and interest received from private sector by local government is $10.

What is the deficit and primary deficit for the local government?

Deficit = [G + TR + INT] - T

Primary deficit: (G + TR) - T

Explanation / Answer

Deficit for Local Govt. = (50 + 150 + 10) - 100 - 10 = $150

Interest paid by local govt = 5/100 * 200 = 10, which is added to the deficit

Primary Deficit = Fiscal Deficit - Interest paid by local govt. = 150 - 10 = $140

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