Government Budget and the Economy

Measures of Government Deficit

Did you know that in the year 2015-2016 the fiscal deficit of India was Rs 5.32 lakh crores? Over the years this government deficit has been a major problem of the Indian economy. The government is constantly trying to control this deficit. Let us learn the concept of Government deficit and the various measures of the government deficit.

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What is Government Deficit?

Government Deficit

A deficit is an amount by which the expenditures in a budget exceed the income. A Government Deficit is the amount of money in the set budget by which the government expenditure exceeds the government income amount. This deficit provides an indication of the financial health of the economy. To reduce the deficit or the gap between the expenditures and income, the government may cut back on certain expenditures and also increase revenue-generating activities.

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Types of Government Deficit

Revenue Deficit

The shortfall between the total revenue received to the total revenue expenditure is revenue deficit.

Revenue deficit = Total revenue expenditure – Total revenue receipts

This deficit only includes current income and current expenses. A high value of deficit indicates that the government should cut down on its expenditures. The government may increase its revenue receipts by increasing tax income. Disinvestment which means selling off assets is another remedial measure to reduce revenue deficit.

Fiscal Deficit

A fiscal deficit is a gap by which government’s total expenditures exceed the government’s total generated revenue. This, however, does not include the government borrowings.

Fiscal deficit = Total expenditure – Total receipts excluding borrowings

Fiscal deficit indicates the amount of money that the government will need to borrow during the financial year. A greater deficit implies more borrowing by the government and the extent of the deficit indicates the amount of expense for which the money is borrowed.

A huge disadvantage or implication of fiscal deficit is it may lead to a debt trap. Also, it may lead to unnecessary and wasteful expenditure by the government. Increased fiscal deficit leads to uncontrolled inflation. Borrowing is one way to reduce fiscal deficit. Another way is deficit financing.

Deficit financing refers to the printing of new notes to increase cash flow in the system. The fiscal deficit is a positive outcome if it leads to the creation of assets. It is detrimental to the economic condition of the nation if it is used to simply cover revenue deficit.

Primary Deficit

A primary deficit is the amount of money that the government needs to borrow apart from the interest payments on the previously borrowed loans.

Primary deficit = Fiscal deficit – Interest payments on previous loans

Measures to Reduce Government Deficit

  • Increased emphasis on tax-based revenues and appropriate measures to reduce tax evasion.
  • Disinvestment should be done where assets are not being used effectively
  • Reduction in subsidies by the government will also help reduce the deficit.
  • Try and avoid unplanned expenditures.
  • Borrowing from domestic sources.
  • Borrowing from external sources.
  • A broadened tax base may also help in reducing the government deficit.

To summarize, a government deficit is a condition where the budget expenditure exceeds the budget revenue receipts. This could be due to a sudden shift in budget requirements. A controlled deficit situation causes an economy to grow.

An uncontrolled government deficit may lead to deterioration in the financial health of the economy. The agenda of the government should be to plan the revenues and expenditures such that the economy moves towards a balanced budget situation.

Solved Question for You

Q: What are the advantages of a budget deficit?

Ans: Some advantages of budget deficit are:

  • Allows the government to carry out large infrastructure and development projects
  • Allows the country to invest in its military at the time of war or unrest
  • Deficit spending when done correctly might be a major stimulus to economic growth
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Shakshi Sharma

What is Capital account of balance of payment ???

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