Measures of Government Deficit

What is Government Deficit?

Deficit is the amount by which the expends in a budget overreach the earnings. The Government Deficit is the amount of money in the budget set by which the government expend overreaches the government earning amount. This deficit furnishes a manifestation of the financial health of the economy. To minimize the deficit or the gap between the expends and income, the government may reduce a few expenditures and also rise revenue initiating pursuits.

In this concept, students can learn about Government deficit and the measures of the government deficit. There are several measures that apprehend government deficit and they have their own inferences for the economy, such as :

  • Revenue Deficit
  • Fiscal Deficit
  • Primary Deficit

What is Revenue deficit?

The revenue deficit mentions to the surplus of 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 symbolizes that the government should reduce its expends. The government may raise its revenue receipts by rising income tax. Disinvestment is selling off assets is another corrective measure to minimize revenue deficit.

What is Fiscal Deficit?

Fiscal deficit is the distinction between the government’s total expend and its total receipts and this excludes borrowing.

Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)

The fiscal deficit has to be financed by borrowing. Hence, it manifests 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 Primary Deficit?

A primary deficit is the amount of money that the government requires to borrow apart from the interest payments on the formerly borrowed loans. We must make a note that the borrowing necessity of the government comprises interest responsibilities on the collected amount of debt. The aim of quantifying primary deficit is to concentrate on current fiscal imbalances. To attain an approximate of borrowing on account of current expends 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 of interest payments – interest receipts by the government on net domestic lending.

3-4 MARKS QUESTIONS

Q1- DISTINGUISH BETWEEN FISCAL DEFICIT AND REVENUE DEFICIT.

ANSWER:
BASIS FISCAL DEFICIT REVENUE DEFICIT
(a) MEANING The fiscal deficit is the excess of Budget Expenditure over Budget Receipt other than borrowings. Revenue deficit is the surplus of Revenue Expenditure over Revenue Receipts.
(b) 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.
(c) FORMULA Budgetary Deficit – Borrowings

Or

BE – BR excluding Borrowings

(RE +CE)(RR+CR excluding borrowings)

Revenue expenditure –Revenue receipts.

Or

RE – RR

Q.2- DISTINGUISH BETWEEN PRIMARY DEFICIT AND REVENUE DEFICIT.
ANSWER:
BASIS PRIMARY DEFICIT REVENUE DEFICIT
(a) MEANING · Primary Deficit is Fiscal Deficit net of Interest Payment.

· It is the difference between Fiscal Deficit and Interest payment.

Revenue deficit is the excess of revenue expenditure over revenue receipts.
(b) SIGNIFICANCE It indicates the Borrowing requirements of the government for the purpose other than interest payment. It reflects the inability of the government to meet its regular and recurring expenditure.
(c) FORMULA Fiscal deficit-Interest payment.

Or

BE excluding interest payment –

BR excluding Borrowings

Or

(RE excluding Int. Payment + CE) –

(RR + CR excluding borrowings)

Revenue expenditure – Revenue receipts.

Or

RE – RR

Q.3- DISCUSS TWO SOURCES TO FINANCE FISCAL DEFICIT.
ANSWER:
FOLLOWING ARE THE TWO SOURCES TO FINANCE FISCAL DEFICIT :
(a) BORROWINGS
  • The fiscal deficit is accomplished by the borrowings from a commercial bank, internal sources like public, etc. or from the external sources like 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 recognized as Deficit Financing.
1 MARK QUESTIONS
Q.1- DEFINE REVENUE DEFICIT
ANSWER:

Revenue Deficit is the excess of revenue expenditure over revenue receipts.

Q.2- WHAT IS FISCAL DEFICIT?
ANSWER:

Fiscal Deficit is the excess of total expenditure (revenue + capital) over total receipts (revenue + capital excluding borrowings).

The above mentioned is the concept that is explained in detail about Measures of Government Deficit for the class 12 students. To know more, stay tuned to BYJU’S.