VSAT 2022

What is the Revenue Deficit?

  • A revenue deficit transpires when obtained net income is smaller than the predicted net income. This occurs when the actual amount of revenue and/or expenditures do not match with budgeted revenue and expenditures. This is the opposite of a revenue surplus, which transpires when the actual net income surpasses the projected amount.


  • In this article, we are going to talk about Revenue Deficit and everything you would ever need to know about it. This can be quite an interesting topic to learn about, especially if you're attracted to learning about financial concepts. This is also a fundamental concept that would be studied during your 11th and 12th economics classes.  We will learn the definition of deficit in revenue, the formula and how to solve any question you've been given, the disadvantages of deficit. You will see a solved example, examples of deficits, and learn many other concepts. You will also learn about the fiscal deficit, revenue deficit, the difference, and much more. Vedantu helps you to answer fundamental questions such as “what is revenue deficit?” effectively.


Understanding Revenue Deficit

  • A revenue deficit, not to be mixed with a fiscal deficit, measures the distinction between the predicted income and the original amount of income. If a company or government has a revenue deficit, its income isn't sufficient to cover its basic services. When that occurs, it may make up for the revenue it needs to cover by acquiring money or selling existing assets.


  • To remedy a revenue deficit, a government can elect to raise taxes or cut costs. Similarly, a business with a revenue deficit can develop by cutting variable costs, such as supplies and labour. Fixed costs are more tricky to adjust because most are built by contracts, such as a building contract.


Difference Between Fiscal Deficit and Revenue Deficit

Businesses and the government use this concept. In simple terms, a deficit arises when the real net income is less than the projected or anticipated net income. There are many disadvantages of revenue deficit which we will be learning more about throughout the essay. The opposite of this, actual net income being more than anticipated net income, is called a revenue surplus. The revenue deficit is often confused with the fiscal deficit, but it shouldn't be. These are both very different concepts. It is the difference between the anticipated amount of income and the actual amount of income. In simple terms, if this occurs, it means that a certain business or even the government is not able to cover its expenses with the income that it has. When this happens, businesses usually opt to borrow or sell assets to get some money to pay for their basic expenses. The major difference between fiscal deficit and revenue deficit is that fiscal deficit is the extra amount of the total government expenditure over receipts during a fiscal year in the current account as well as the capital account. These receipts are from tax as well as non-tax sources; however, it doesn't include the borrowings. It indicates insufficient funds to finance the functioning of a business or government. The revenue deficit is the difference between the expected government expenditures and receipts during a fiscal year in a revenue account.  This indicates an increase in future liabilities on the interest payment and loan payments of the government. Many students get confused between these two, which is why it is very important to know the difference between fiscal deficit and revenue deficit. 


Basis

Fiscal Deficit

Revenue Deficit

General definition

Fiscal deficit is the difference between the government’s total revenue and the total expenditure, excluding the borrowings. 

Revenue deficit arises when revenue expenditures exceed revenue receipts.  

Indicator

Fiscal deficit indicates the required total borrowings of the government.

Revenue deficit indicates the dependency on loans of the coming time span. 

Reason of creation

Hiked capital expenditure is the main reason why fiscal deficit arises.

The reason behind having a revenue deficit is excess actual net receipts of government over projected receipts. 


This deficit can be avoided or reduced by recognising and applying measures that would reduce or cut the costs. This way, the revenue would be greater than the expenditure hence giving a surplus instead of a deficit. 


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How to Calculate the Deficit, and What is the Formula?

The deficit or surplus is calculated by deducting the revenue expenditure from the total revenue receipts. In simple terms, the revenue deficit formula is:


Revenue Deficit = Total Revenue Receipts – Total Revenue Expenditure


Revenue Receipts

Revenue receipts can be interpreted as those receipts that neither form any liability nor cause any decline in the government's assets. These receipts are regular and recurring, in nature.


Revenue Expenditure

Short-term expenses of the current period or the ones used within one year are termed revenue expenditures. These expenses typically include expenses incurred to meet the open-ended operational costs of running a business.

 

What are the Disadvantages of Revenue Deficit?

By reading about examples of revenue deficit, you can realise how it has a negative impact and what the disadvantages are. Some of the disadvantages are:

  • It can negatively affect the credit rating of a business or government because it means that the business/government is not able to meet its current and future costs meaning that they would have to borrow or disinvest to cover up. 

  • If a business has a deficit, it may become difficult for banks to provide them with loans or investors to invest because it shows that the receipts are less and the expenditure is more. This implies that returns would be less; hence it is not a good investment. The deficit also makes the business look less attractive to potential investors, existing investors, potential employees, etc. 


In this post, we have studied what revenue deficit, the causes, the disadvantages, how to calculate it, and more. Now let's look at a solved example of revenue deficit to give you more understanding and some frequently asked questions that would solve any other doubt that you might have.

 

Conclusion

  • A deficit doesn’t mean a loss. 

  • Revenue deficit implies that basic operations can be covered with the revenue one has

  • An effective revenue deficit formula is total revenue receipts – total revenue expenditure.

  • You can reduce the deficit by cutting costs. 

  • The major difference between fiscal deficit revenue deficit


To learn more about examples of revenue deficits be sure to collaborate with Vedantu.

FAQs on Revenue Deficit

1) How can revenue deficit be met?

Many ways can be used by businesses or the government to overcome this financial problem. A few methods that the government chooses are:

  • They increase their tax or non-tax receipts. This increases their revenue and brings it closer or more than its anticipated revenue. 

  • They could also sell existing assets or borrow to meet the deficits from the capital receipts. Borrowing and selling would increase the receipts. 

  • The government can attempt to reduce expenditures that are not needed. This would reduce the actual expenditures, thus reducing the overall deficit. 

2) What is an example of a revenue deficit?

  • Suppose the revenue of the government is anticipated to be 420 million in 2015 and the expenditures to be 300 million for a projected net income of 120 million. At the end of the year, the company noticed that the real income was 405 million and the expenditures were 305 million. This meant that the net income was 100 million. 

  • Therefore, by using the revenue deficit formula, there would be a deficit of 20 million because 100 million - 120 million would be a deficit of 20 million.

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