inflation-adjusted budget deficit

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The budget deficit which would result if government expenditure was reckoned as including the real rather than the nominal interest paid out. For example, consider a government whose budget deficit before adjustment for inflation equals 2 percent of gross national product (GNP). If net government debt equals half of GNP, and nominal interest rates are 10 percent whereas inflation is 5 percent, then nominal debt interest equals 5 percent of GNP, while real debt interest equals only 2½ percent of GNP. In this case a nominal budget deficit equal to 2 percent of GNP corresponds to an inflation-adjusted budget surplus equal to ½ percent of GNP.

Subjects: Economics.

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