Government Deficit

Before we delve into such measures to compensate for the budgetary deficit, let's brush our basics about government deficit in general.

Typically, a deficit can be defined as the amount of money in a budget by which total expenses of a government exceeds its total earnings. Notably, deficit plays an essential role in determining the financial health of an economy. To elaborate, the lower is the gap between total earnings and total expenses, the better it is for an economy positioned in terms of finances.

Depending on the current government deficit and its type, each year, certain adjustments are made to the budget to remedy such a situation. For example, the government may decide to increase revenue-generating opportunities or may decrease certain expenses to Minimise that gap.

The government attempts to adopt remedial measures that directly or indirectly tend to influence some components of their budget.  That being said, this table below represents all significant components of a government budget. Images will be uploaded soon :


The government budget is broadly divided into revenue budget and capital budget.

  1. Revenue Budget

It comprises revenue receipts and revenue expenditure. Revenue receipts can be defined as income generated from all possible sources. It is further divided into two categories - tax revenue and non-tax revenue. Tax revenues are collected through direct and indirect taxes, while non-tax revenues are collected as fees, penalties, grants, etc.

On the other hand, revenue expenses are mostly incurred while maintaining the government's everyday operations and its various departments.  Expenses on subsidies, agriculture, health education, defence, all fall under revenue expenses. Such expenses can further be categorised as planned or unplanned.

  1. Capital Budget

It consists of capital receipts and capital expenditure, where the latter, i.e. capital expenditure, can be divided into two categories – planned and unplanned.

Notably, capital receipts are earnings which tend to create a liability or may lead to a reduction in its total share of assets. These earnings are mostly generated by raising loans, disposing assets or recovering old loans.

In the case of capital expenditure, money is usually spent on creating new assets. Purchasing machines, plots, equipment, etc. are suitable examples of capital expenditure.

After the quick overview of the government deficit, let's move onto the different types of deficits.


Types of Deficit

There are 3 Types of deficits, namely -

  1. Revenue deficit

  2. Fiscal deficit

  3. Primary deficit

Let's read along to find more about these different types of deficit and suitable measures that are adopted to remedy them accordingly. 


What is Revenue Deficit?

In simple words, a revenue deficit can be defined as the excess of revenue outflow over revenue receipts.

In other words, when the government tends to spend more on revenue expenditure than earn from its revenue receipts, it is subjected to revenue deficit.

It can also be expressed as –

Revenue Deficit = Revenue Expenses – Revenue Receipts

Such a deficit also signifies that the government's earnings are not enough to keep the operations of its departments and other services actively running. Furthermore, such a deficit leads to more borrowing. Since loans have to be paid with interest, it further increases the bulk of revenue expenditure. In turn, it leads to a greater revenue deficit and implies a repayment burden for the future.


Suitable Measures

To cope up with revenue deficit, the government may either decide to curtail significant expenses or opt for an increase in its tax and non-tax receipts.

Let's take a glance through the reformative measures against such government deficit.

  1. An increase in income tax

  2. Imposition of new taxes

  3. Controlling unnecessary expense

  4. Selling of assets

Test Your Knowledge : Identity which of these following is revenue expenditure –

  1. Loan repayment  b) Subsidies c) Tax collection expenses  d) Bridge construction expenses


What is Fiscal Deficit?

Typically, the fiscal deficit meaning can be described as the situation, wherein, a government's total expenditure exceeds its total receipts, minus the borrowings within a financial year. It serves as a measure of the amount of money that the government needs to borrow to meet its expenses, especially at a time when its resources are insufficient. It can be expressed as –

Gross Fiscal Deficit = Total Expenditure – (Revenue Earning + Non-Debt Creating Receipts)

A higher fiscal deficit indicates that the government has to borrow a substantial amount of money to meet its expenses. Resultantly, such deficits often lead to debt traps and create inflationary pressure. Thus, from the financial point of view,

Gross Fiscal Deficit = Net Borrowing at Home + Total Borrowing from RBI +Total Borrowing from Abroad

However, depending on the use, the fiscal deficit can prove to be beneficial for an economy if it leads to the creation of new capital assets and sustainable sources of revenue. Contrarily, it may have an unfavourable impact on the economy if it is used only to tide over the revenue deficit.

Note: The economy can go through a fiscal deficit even when there is no revenue deficit. Usually, when the revenue budget is well balanced, but there is a deficit in the capital budget, it leads to a fiscal deficit. Similarly, a fiscal deficit can occur when there is an excess of revenue budget, but it is still less than the capital budget deficit.

Suitable Measures

Borrowing is a potent way of solving the problem of fiscal deficit. However, it must be noted that the safe limit for such borrowing is said to be 5% of GDR.

That being said, let's check out the remedial measures given below –

  1. Borrowing from domestic sources and external sources

  2. Deficit financing through the printing of new currency notes

  3. By reducing expenses on public expenditure like major subsidies, LTC, bonus, etc.

  4. Reducing non-plan expenses

  5. By increasing revenue by broadening tax bases, emphasising direct taxes, curtailing tax evasions and through sale and restructuring of shares in units of the public sector

Test your knowledge: With the help of the data given below, find out – revenue deficit and fiscal deficit.

Capital receipts (Net of Borrowings)

Rs.95 Crore

Revenue expense

Rs.100 Crore

Revenue receipt

Rs.80 Crore

Capital expense

Rs.110 Crore

Interest payment 

Rs.10 Crore


Now that we have become familiar with the two of the three types of government deficit, let’s check out the last one of the lot.


What is Primary Deficit?

It can be explained as the fiscal deficit of a given year without the payment of interest on previous borrowings.

In simple words, it can be said that fiscal deficit tends to indicate the borrowing requirement of the government inclusive of loan interest payment. On the other hand, the primary deficit indicates the borrowing requirement that excludes loan interest payment.

Primary deficit helps the government to figure out the amount of money they need to borrow to meet all expenses other than loan interest payment. Notably, when this type of government deficit is zero, it indicates that the government just needs to borrow an amount that would suffice to meet the interest payment.

It can be expressed as –

Primary Deficit = Fiscal Deficit – Loan Interest Payments

Test your skills: The fiscal deficit for FY 2012-2013 stood at Rs.5, 13,590, and interest payments amounted to Rs.3, 19,759. What would be the primary deficit?


An Overview of Fiscal Deficit, Revenue Deficit and Primary Deficit

The table below highlights the point of differences between these three deficits -

Parameters

Revenue Deficit

Fiscal Deficit

Primary Deficit

Definition

The excess of revenue expenditure over revenue income.

It is the excess of total expenses over total receipt except for borrowings.

It is the difference between fiscal deficit and loan interest payment.

Importance

Indicates the inability of the government to meet its expenses with its sources of income.

Indicates the total amount that needs to be borrowed in a financial year.

Indicates the amount of money required to be borrowed to meet requirements other than repayment of interest amount.

Formula

Revenue deficit = Revenue expenses – revenue income.

Gross fiscal deficit = Total expenditure – (Revenue earning + non-debt creating receipts)


Primary deficit = Fiscal deficit – Interest payments



Test your knowledge: List down two ways in which the government tackles revenue deficit and fiscal deficit.

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FAQ (Frequently Asked Questions)

1. What are the Types of Government Deficit?

Ans. There are 3 types of deficit – 1. Revenue deficit 2.Fiscal deficit 3.Pimary deficit.

2. What is Fiscal Deficit?

Ans.  Fiscal deficit can be explained as the situation where a government's aggregate expenses exceed its total income, excluding borrowings in a given financial year. It helps to calculate the total amount of money the government needs to borrow.

3. What is Revenue Deficit?

Ans. Such a deficit highlights the situation wherein a government's revenue expenditure is more than its revenue receipts.

4. What is Primary Deficit?

Ans. Primary deficit is the difference between a current year's fiscal deficit and interest payments on previous borrowings.