Fiscal deficit is termed as the difference between the total revenue and total expenditure of a government in a financial year. The condition of fiscal deficit arises when the expenditure of a government is more than the revenue generated by the government in a given fiscal year.
Fiscal deficit occurs due to events like a major rise in capital expenditure or deficit arising from revenue. It serves as an indicator of how well the government is managing its finances.
Let us look at the process of calculating fiscal deficit and also study the components that make up the fiscal deficit.
How is Fiscal Deficit Calculated?
The fiscal deficit is calculated by subtracting the total revenue obtained by the government in a fiscal year from the total expenditures that it incurred during the same period.
Mathematically, it can be represented as
Fiscal deficit = Total Expenditure – Total Revenue (excluding the borrowings)
Fiscal deficit is seen in all economies, while the surplus is considered as a rare occurrence. A high fiscal deficit is not always seen as bad for the economy; it is good if the amount is used in constructing roads, railways, airports, etc. These will be generating revenue for the government after a certain period.
Components of Fiscal Deficit
The fiscal deficit is composed of two components, namely income and expenditure. The components are discussed in brief in the following lines
Components of Total Income of the government
These consist of two variables, which are revenue generated from various taxes such as GST, Taxes from union territories, custom duties, corporation tax, etc. collected by the centre and the non-tax revenues which consist of dividends and profits, interest receipts and other non-tax revenues.
Components of Expenditure
The government expenditure consists of capital expenditure, revenue expenditure such as salary and pension payments, grants for creation of capital assets, infrastructure, healthcare and interest payments.
Fiscal deficit is calculated as a percentage of the GDP (Gross Domestic Product)
How does the government balance the fiscal deficit?
Governments take borrowings in the form of issuing bonds and selling them via the banks. Banks buy those deposits and then sell them to the investor. Government bonds are considered a safe form of investment and hence are free from risk.
A situation of fiscal deficit prompts governments to indulge in welfare activities for the nation, without any need to raise taxes.
This was all about the concept of fiscal deficit, which plays an important role in the economy of a nation. For more such interesting concepts on Economics for Class 12, stay tuned to BYJU’S.