Fiscal Deficit: Meaning and Implications

A fiscal deficit can be defined as the difference between the total revenue and the total expenditure of the government. More precisely, the fiscal deficit is the excess of total expenditure over the revenue receipts. This is an indication of the total borrowings required by the government. 

To mention, the borrowings and the non-debt capital receipts are not included while calculating the total revenue but while calculating the total expenditure loans are included.

Further, we will know more about Fiscal Deficit, why it occurs, ways to curb it, and so on. 

More about Fiscal Deficit

Two prime components which include the government receipts are:

• Revenue Receipts 

• Non-Tax Revenues.

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Revenue Receipts of the Government

The Receipts that are received by the Government in terms of Revenue are as Follows:

• Corporation Tax

• Income Tax

• Custom Duties

• Union Excise Duties

• GST and taxes of Union territories.

Non-Tax Revenues include:

• Interest Receipts

• Dividends and Profits

• External Grants

• Other non-tax revenues

• Receipts of union territories

While the Expenditures of the Government include:

• Revenue Expenditure

• Capital Expenditure

• Interest Payments

• Grants-in-aid for creation of capital assets

What Causes Fiscal Deficit?

The government faces the situation of fiscal deficit as for the handouts and other assistance work provided to the weak and vulnerable sections of the society. In fact, a high fiscal deficit in the country is considered good as long as the money is spent on the creation of productive assets like highways, roads, ports, and airports, or it is used to boost economic growth like providing education or creation of job. 

How is the Fiscal Deficit Met?

On a general basis, the government meets fiscal deficit by borrowing money. While calculating, it is a way that the total borrowing requirements of the government in one financial year is equal to the fiscal deficit of that year.

So, we can say to solve this fiscal deficit the government borrows funds. 

Fiscal Deficit Formula 

Now, we will see how Fiscal Deficit is calculated.

Fiscal Deficit = Total Expenditure of the Government (Capital and Revenue Expenditure) – Total Income of the Government (Revenue Receipts + Recovery of Loans + Other Receipts)

If the total expenditure of the government exceeds the total revenue and non-revenue receipts in a financial year, then that gap formed is the fiscal deficit for that financial year. The fiscal deficit is represented as a percentage of GDP. 

Implications

There is a negative implication of this fiscal deficit. We will learn those implications in the following section:

Debt Traps:

We know that the fiscal deficit is being solved by borrowing. Borrowing comes in paying interest as well as repaying the borrowed amount. Hence, if the government borrowing increases soon the country will face a debt trap. 

Wasteful Expenditure:

The high fiscal deficit leads to wasteful and unnecessary expenditure by the government, so this can also create an inflationary pressure on the whole economy.

Inflationary Pressure:

After the government borrows from the RBI, which means the RBI is required to print more currency notes, which is called deficit financing, and this, in turn, would result in the circulation of more money in the economy creating inflationary pressure in the economy.

Partial Use:

The entire fiscal deficit, which is being borrowed is not available for the growth and development of the economy as a part of the borrowed money is used for interest payment. So, this is partial use of the borrowed funds in the development process. 

Retards Future Growth:

Borrowing is actually a financial burden on future generations. They need to pay loans and interest amounts, this retards the growth of the economy.

Measures to Reduce the Fiscal Deficit

In order to curb this fiscal deficit, we need to figure out ways. Following are the methods to stop the deficit: 

To Reduce Public Expenditure:

• A reduction in the expenditure on subsidies.

• Reduction in expenditure on bonus.

• Steps to curtail non-plan expenditure.

To Increase the Revenue:

• The tax base is to be broadened and the concessions in taxes should be curtailed.

• Tax evasion is to be effectively checked.

• Emphasis is to be put on direct taxes to increase revenue.

• Restructuring, as well as the sale of shares in the public sector units, is to be done.