[Commerce Class Notes] on Government Deficit Pdf for Exam

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 exceed its total earnings. Notably, the 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, defense, all fall under Revenue expenses. Such expenses can further be categorized as planned or unplanned.

2. 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 that 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 of 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 on to 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.

Implications of Revenue Deficit

• It indicates the government’s inability to meet its regular and recurring expenditure in the proposed budget.

• It implies that the government is using up the savings of other sectors of the economy to finance its expenditure.

• It means that the government has to make up for this Deficit from capital receipts, through disinvestments and borrowings. This leads to an increase in liability and a reduction in assets.

• The use of capital receipts for meeting the expenditure leads to inflation in the economy. High borrowings increase the future burden.

• A high Revenue Deficit is a warning signal that the government is unable to curtail its expenditure or increase its Revenue.

According to the far-sighted approach, Revenue receipts should always be more than Revenue expenditures so that surplus can be used for development projects. However, the Indian Budget has been facing a Revenue Deficit for the past several years.

Suitable Measures

To cope 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 a government Deficit.

1. The government should reduce its expenditure by identifying unnecessary and unproductive expenses.

2. An increase in income tax could help reduce the Deficit.

3. Imposition of new taxes in areas like import, customs, roads, food, etc.

4. The government can resort to selling its assets to make up for the Deficit. 

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

1. Loan repayment  

2. Subsidies 

3. Tax collection expenses 

4. 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.

Implications of Fiscal Deficit

• Debt Trap: Fiscal Deficit indicates the total borrowing needs of the government. Borrowings involve not only the principal amount but also interest payments. The revenue expenditure rises as these payments increase, leading to further revenue Deficit. This creates a vicious circle of Fiscal and revenue Deficits, where the government has to take more loans to repay the earlier ones, leading the country into a debt trap.

• Inflation: When the government borrows from the Reserve Bank of India (RBI) to meet its Fiscal Deficit, RBI has to print new currency to meet the requirements of the Deficit. This increases the money supply in the economy but creates inflationary pressure.

• Foreign Dependence: It increases the government’s dependence on other countries if it resorts to borrowing from outside.

• Hampers the Future Growth: Borrowings directly increase the financial burden for future generations, creating an adverse effect on the future growth and development of the country.

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 –

• Borrowing from domestic sources and external sources like the market, small savings funds, state provident funds, external sector, and short-term funds. 

• Raising taxes. These taxes can include federal, state, and in some cases, local income and business tax. Other examples include corporate tax, estate tax, property taxes, etc.

• Deficit financing through the printing of new currency notes. This can cover payments on debts issuing securities, such as Treasury bills and bonds. But it does carry the risk of devaluing the nation’s currency.  

• Reduce regulations and lowering corporate income taxes. This helps improve business confidence, and in turn, results in job growth. This helps promote economic growth and generate higher taxable profits and more income tax.

• By reducing public expenditure like major subsidies, LTC, bonuses, etc.

• Reducing non-plan expenses.

• By increasing revenue. This can be done by emphasizing direct taxes, curtailing tax evasions, broadening the tax base, and with sale and restructuring of shares of the public sector.

Test Your Knowledge:  With the help of the data given below, find out.

Revenue Deficit and Fiscal Deficit.

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 a 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

Implications of Primary Deficit

• It indicates how much of the government borrowings are going to meet expenses other than the interest payments. 

• The difference between primary Deficit and fiscal Deficit indicates how much of the interest payments on the borrowings have been made in the past. A low or zero primary Deficit indicates that interest payment on earlier loans has forced the government to borrow.

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?

The table below highlights the point of difference between these three Deficits –

An Overview of Fiscal Deficit, Revenue Deficit, and Primary Deficit

 

Test Your Knowledge: 

List down two ways in which the government tackles revenue Deficit and fiscal deficit.

In case you want to strengthen your grasp on the concept of government Deficit or want to learn about related topics in detail, you can join ‘s free online classes. Also, by accessing our study materials and the latest chapter-based solutions, you would be able to improve your grasp on the subject significantly.

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