What is the general government balance?
The general government balance is the difference between government revenues and government expenditures, encompassing all government entities.
- If this difference is positive, it is called a surplus and it means that this sector is in a net lending position.
- If the difference is negative, it is called a deficit, meaning a net borrowing position for the sector.
The main sources of general government revenue are taxes and social contributions, while the main expenditure items include civil service salaries, social benefits, interest payments on debt, subsidies and gross fixed capital formation.
Another commonly used fiscal indicator is the primary balance. This is the difference between total government revenue and government primary expenditure (i.e. expenditure excluding interest payments on debt).
General government or primary balances are expressed in currency units. However, for analytical purposes they are often reported as a percentage of a country’s gross domestic product (GDP).
How is the general government balance calculated?
The general government balance is calculated according to the European system of national and regional accounts (ESA 2010). The use of a harmonised methodology at European level means that data can be compared across countries.
The balance is calculated from a non-financial (or real) perspective, which measures the difference between the revenue and expenditure of all entities within the government sector i.e. central, local and state governments, as well as social security institutions.
Why does the general government balance matter?
The general government balance, together with government debt, is one of the most important indicators when it comes to assessing public finances. Cumulative deficits can lead to an increase in debt levels, which can potentially undermine fiscal sustainability.
To promote fiscal responsibility, the Member States of the European Union have agreed to observe budgetary discipline by respecting certain criteria, including a deficit-to-GDP ratio that does not exceed the reference value of 3%. These criteria are set out in the Protocol to the Treaty on the European Union on the excessive deficit procedure (EDP). According to current legislation, EU countries are required to report EDP-related data to Eurostat twice per year, at end-March and end-September. The data are then analysed and validated by Eurostat.
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