Primary balance describes the condition where expenditures (excluding interest payment and debt redemption) are covered by revenues excluding bond revenues (deficits). In this condition, general expenditures for the year and the tax burden for the same year are balanced. In recent years, Japan has been experiencing a considerable primary deficit.

The Definition of Primary Balance

	The Relationship between Primary Balance and the Amount of Bonds Outstanding
		When primary balance is achieved, bonds outstanding increase by the amount equivalent to interest payment (colored portion of the chart). This is because new bond issues can only be allotted to debt redemption and interest payment.     In this case, if, for example, the nominal GDP growth rate equals the nominal interest rate, bonds outstanding increase at the same rate as the nominal GDP. As a result, the bonds outstanding to nominal GDP ratio remains stable. This is why the achievement of primary balance is very important when we consider medium-term fiscal sustainability.     However, the interest rate has been greater than the nominal GDP growth in recent years, and the bonds outstanding to GDP ratio will rise even if primary balance is achieved.

Trends of Primary Balance (SNA Base: central and local governments combined)

It is estimated that the primary deficit for FY2003 (central and local governments combined) will be 5.4% compared against the GDP. The central government is aiming to turn the deficit into a surplus by the beginning of the 2010s by promoting all forms of structural reform, including fiscal structure reform.