Understanding Budget Deficit

Commonly, all of us prepare a budget for a destined time period, or for any event. When our expenses exceed the budgeted amount, we say that we face a budget deficit. Similarly, in Economics the term ‘budget deficit’ is coined from this basic principle of expenses exceeding the revenues. This is a macroeconomic study, hence the budget deficit concerns the economy as a whole and not any specific business.

Here, we will go through the details of this topic, where we will answer important questions like ‘What budget deficit?’, the formula of the same, the types of the budget deficit, etc. 

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In scenarios where the budget deficit occurs, we see that the current expenses had exceeded the total amount of income that is being received through the procedure of the standard operating system. A nation that wishes to correct its own budget deficit might require to lower down or cut back certain expenditures and increase their revenue-generating activities, or they might also operate a strategy where they will employ a combination of these two.

Types of the Budget Deficit 

The following are the types of budget deficit and the factor which causes the deficit is also indicated side to it.

The Types:

• Revenue Deficit: Revenue expenditure when gets reduced by revenue receipts.

• Fiscal Deficit: Total expenditure when gets reduced by the total receipts except for the borrowing part.

• Primary Deficit: The fiscal deficit when get reduced by the payment of interest.

• Effective Revenue Deficit: The revenue deficit when it gets reduced by the non-payment of grants which is required for the creation of the capital assets.

• Monetized Fiscal Deficit: This part of the fiscal deficit is being later covered up by borrowing from the RBI.

Budget Deficit Formula

How do we know if the country is facing any budget deficit? The economist of a country needs the estimation of this indicator to indicate and further analyze if the country is facing any situation of the budget deficit. Thus, in order to find the estimation, they calculate using the formula of Budget Deficit.

Hence, the budget deficit formula is – 

Revenue deficit = Total revenue expenditure – Total revenue receipts. ... Fiscal deficit = Total expenditure – Total receipts excluding borrowings.

Government Budget Deficit 

Government debt is defined as the stock that is outstanding and is issued by the government at any time in the past period which is not yet repaid from where it was previously utilized from.

A Government budget deficit happens when a government spends more in a given year than what it collects in the form of revenues, such as taxes. For example, if a government takes in 10 Cr in revenue in a particular year, and its expenditures for the same year are 12 Cr, then the government is running a deficit of 2 Cr.

The Government issues its own debt whenever public borrowing is done. Thus, the amount of this outstanding debt will be equal to the amount of the net borrowing which is being borrowed by the government from the public. While, this deficit is another extra addition in the current period (which can be a year, quarter, month, etc.) to the outstanding debt amount of the government. The deficit will be a negative figure when the value of the outstanding debt lowers down, which says the negative deficit is actually the surplus.

Budget Deficit Example

Meera is the founder of a small start-up business that makes artistic handcrafts. In order to widen her own business, she decided to purchase a factory and other necessities. Furthermore, she was also required to hire and also pay the employees, and also take care of their benefits. In the first year, Meera’s company had a budget surplus of Rs. 100,000.

But, in the next year, the economy went through a period of recession thus her business that year lacked growth and she could only sell her handicrafts worth Rs. 300,000. Her cost, on the other hand, escalated to Rs. 700,000. Now, her company ran into a budget deficit of Rs. 400,000 (Rs. 700,000 – Rs. 400,000)

Fiscal Deficit and Budget Deficit

First let us know, what is a fiscal deficit?

Fiscal Deficit can be defined as the excess of the total expenditures which is expensed out over the total receipts which are received in a time period, this is calculated excluding the borrowings part in a single year. Calculating the Fiscal deficit gives an estimation of the amount which is to be borrowed by the government to meet all the expenses. The higher the amount the Fiscal Deficit, the higher will be the borrowed amount. 

The formula which is required for calculating the fiscal deficit is as follows:

> Fiscal deficit = Total expenditures – Total receipts excluding borrowings

Thus, the Budgetary deficit is the only difference between all the receipts and all the expenses in both terms, that is revenue and capital account of the government. While a fiscal deficit occurs when the government's total expenditures exceed the revenue which is being generated, this excludes the money that is from the borrowings.

Advantages of Budget Deficit

• If there is an increase in the fiscal deficit, it can actually boost a sluggish type economy by providing more money to the people, thereby they can now buy and invest even more. However, deficits for a longer time will be detrimental to the overall economic growth. 

• In times of recession, the economy tends to lower its cost and focus more on revenue-generating activities. Budget Deficit can actually be a realization to the government, he will take actions to combat the situation.

Did You Know?

• The highest country with a maximum budget deficit is the United States with -480,225. Next, the second-highest country with the maximum budget deficit is the UK with -121,921. 

• The opposite of the budget deficit is known as a budget surplus. In a budget surplus, revenue the current expenses exceed the funds which are to be allocated as desired.

Thus, we see that the budget deficit is an advantage to the country to some extent, while the deficit is to be curbed accurately. From this study, we know about the types and the formula of Budget Deficit. From the examination point of view, the chapter is vital for the students to study.