Fiscal Deficit

What is Fiscal Deficit?

Fiscal Deficit refers to the amount by which the Government’s total expenditure exceeds its total receipts (excluding borrowings). In other words, a Fiscal Deficit occurs when the government expenditure is more than the revenue generated in a fiscal year.

Government Deficit refers to the amount by which the Government expenditure exceeds its revenues. The various measures of Government deficit are Revenue Deficit, Fiscal Deficit and Primary Deficit. In this article, we shall focus on the fiscal deficit aspect of the Government budget.

Fiscal Deficit Formula

Fiscal Deficit = Total Government Expenditure – Total Government Revenue

Here,

Total Government expenditure = Revenue Expenditure + Capital Expenditure

Total Government Revenue = Revenue Receipts + Recoveries of Loans + Other Capital Receipts

It is important to note that Total Government revenue does not include any borrowings.

Usually, we express Fiscal deficit as a percentage of the GDP i.e. gross domestic product.

What are the components of the fiscal deficit calculation?

The fiscal deficit comprises two components, revenue and expenditure.

Total Government Revenue

Total revenue comprises two variables namely, tax revenue and non-tax revenue.

Tax revenue is generated from various taxes such as GST, taxes from union territories, custom duties, corporation tax, etc. These are collected by the centre.

The non-tax revenues include dividends and profits, interest receipts, and other non-tax revenues.

Total Government Expenditure

Total expenditure comprises capital expenditure, revenue expenditure (salary and pension payments), infrastructure, healthcare, interest payments and grants for the creation of capital assets.

What causes Fiscal Deficit?

A fiscal deficit occurs when the Government expenditure is more than its revenues. But, why will such a situation arise? The answer to this is that the government faces such a situation when it provides aids to the weak and vulnerable sections of society. In such cases, a high Fiscal deficit is favourable.

How is the fiscal deficit balanced out?

In order to balance out the Fiscal deficit, the government borrows funds equal to that year’s fiscal deficit. It borrows the funds in the form of issuing bonds. Banks buy these bonds and then sell them to the investors. These are commonly known as Government bonds and are considered a safe form of investment. Hence, they are risk-free investments.

Frequently Asked Questions on Fiscal Deficit

Q.1. Is Fiscal Deficit good for the economy?

Answer. Fiscal Deficit is good for the economy as long as the money is used for creating productive assets (like highways, roads, ports, and airports) or it is used to stimulate economic growth and employment.

Q.2. What is the formula for Gross fiscal deficit?

Answer. Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad

Q.3. Name the negative implications of Fiscal Deficit.

Answer. The negative implications of Fiscal Deficit are:

1. Debt traps
2. Wasteful expenditure
3. Inflationary pressure
4. Retardation of future growth.