What is a government deficit?
Deficit is the amount by which the spending done in a budget surpass the earnings. A government deficit is the amount of money in the budget by which the spending done by the government surpasses the revenue earned by it. This deficit presents a picture of the financial health of the economy. To minimise the deficit or the gap between the expenses and the income, the government may reduce a few expenditures and also increase revenue-initiating pursuits.
In this concept, students can learn about the government deficit and its measures. There are several measures that apprehend a government deficit, and they have their own inferences for the economy, such as:
- Revenue deficit
- Fiscal deficit
- Primary deficit
Also Check: Objectives of Government Budget
What is a revenue deficit?
A revenue deficit refers to the surplus of the government’s revenue expenditure over the revenue receipts.
Revenue deficit = Revenue expenditure – Revenue receipts
This deficit only incorporates current income and current expenses. A high degree of deficit symbolises that the government should reduce its expenses. The government may raise its revenue receipts by raising income tax. Disinvestment and selling off assets is another corrective measure to minimise a revenue deficit.
What is a fiscal deficit?
A fiscal deficit is the distinction between the government’s total expenditure and its total receipts, which excludes borrowing.
Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)
A fiscal deficit has to be financed by borrowing. Hence, it includes the total borrowing necessities of the government from all the possible sources. From the financing part,
Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad
What is a primary deficit?
A primary deficit is the amount of money that the government requires to borrow from the interest payments on the formerly borrowed loans. We must take a note that the borrowing necessity of the government comprises interest responsibilities on the collected amount of debt. The aim of quantifying the primary deficit is to concentrate on current fiscal imbalances. To attain an approximate borrowing on account of current expenses overreaching revenues, we need to compute what has been known as the primary deficit. It is the fiscal deficit, the interest payments.
Gross primary deficit = Gross fiscal deficit – Net interest liabilities
Net interest liabilities comprise interest payments – interest receipts by the government on the net domestic lending.
Difference between Fiscal Deficit and Revenue Deficit
|Parameters||Fiscal deficit||Revenue deficit|
|Meaning||A fiscal deficit is the excess of budget expenditure over budget receipts other than borrowings.||A revenue deficit is the surplus of revenue expenditure over revenue receipts.|
|Significance||It reflects the total government borrowings during a fiscal year.||It reflects the inefficiency of the government to reach its regular or recurring expenditure.|
|Formula||Budgetary deficit – Borrowings
BE – BR excluding borrowings
(RE + CE) – (RR + CR excluding borrowings)
|Revenue expenditure – Revenue receipts
RE – RR
Difference between Primary Deficit and Revenue Deficit
Sources to Finance Fiscal DeficitThe following are the two sources to finance fiscal deficit:(a) Borrowings
- A fiscal deficit is accomplished by the borrowings from a commercial bank, internal sources like public or from external sources such as international agencies like IMF, foreign governments, etc.
(b) Deficit financing (i.e., Printing new currency)
- The government can also borrow funds from RBI against its securities to meet the fiscal deficit. Therefore, RBI issues new currency for this purpose.
- This process is recognised as deficit financing.
This concept was about measures of government deficit. Stay tuned for questions papers, sample papers, syllabus, and relevant notifications on our website.
|Parameters||Primary deficit||Revenue deficit|
|Meaning||Primary deficit is referred to as the difference that exists between the fiscal deficit of the current year and the interest payment that was needed to be paid in the previous fiscal year.
|A revenue deficit is the excess of revenue expenditure over revenue receipts.|
|Significance||It indicates the borrowing requirements of the government for the purposes, excluding the interest payment.||It reflects the inability of the government to meet its regular and recurring expenditure.|
|Formula||Fiscal deficit – Interest payment
BE excluding interest payment –
BR excluding borrowings
(RE excluding interest payment + CE) –
(RR + CR excluding borrowings)
|Revenue expenditure – Revenue receipts
RE – RR
|Important Topics in Economics:|