Budget Deficit

What is a Budget Deficit?

A budget deficit is said to occur when expenditures supersede income. The word budget usually refers to government spending but it can also be applied to individuals and businesses. In other words, a budget deficit will take place if income is unable to meet the demands of expenditures.

Governments usually income revenues through which they have to meet the expenses. When this revenue falls short to meet the expenses, a deficit budget occurs. A budget deficit is an undesirable outcome and entities want to avoid it generally.

Types of Budget Deficits

Budget deficits are of three types which are

• Fiscal deficit
• Revenue deficit, and
• Primary deficit

Fiscal Deficit

A fiscal deficit is a difference between total revenue and total expenditure of the government. It indicates the total borrowing the government needs to meet its targets. Borrowings are not included in the calculation of revenue.

The gross fiscal deficit (GFD) is the extra expenditure including various loans net of recovery over the various forms of revenue receipts (such as external grants) and non-debt capital receipts. The net fiscal deficit, on the other hand, is the gross fiscal deficit minus the net lending made by the Central government.

Usually, a fiscal deficit occurs either because of a revenue deficit or a palpable hike in capital expenditure. Capital expenditure is made to create long-term assets, including buildings, factories, and other development.

A deficit is usually financed by the government through borrowing from the Reserve Bank or by raising money from capital markets. To raise money from capital markets, the government may issue different instruments like treasury bills (T-bills) and bonds.

Impact of Fiscal Deficit

Following are the key impacts of fiscal deficit −

• Unnecessary expenditure − A high fiscal deficit means unnecessary expenditure by the government which may create an inflationary pressure on the economy.
• Deficit Financing − Fiscal deficit leads to printing more currency by RBI which is known as deficit financing. It increases the availability of money in the market, which may lead to inflation.
• More borrowing hinders the growth of the economy because the revenues are utilized to meet debt payments.

Remedial Measures for Fiscal Deficit

The fiscal deficit can be reduced in the following ways −

• Reduced public expenditure by the government
• Reduction in bonus, leave encashment, and subsidies
• Disinvestment of public sector units
• Increasing tax to generate revenue

Revenue Deficit

The extra expenses over receipts on the revenue account are called revenue deficits.

Revenue deficit = Revenue Expense – Revenue Receipts

Revenue deficit is an important control indicator. All expenditures on the revenue account should generally be met from receipts on the revenue account; the revenue deficit should ideally be zero.

When the disbursement of revenue exceeds receipts, the government will have to borrow. Such borrowing is considered regressive in nature because it is for consumption proposes and not for creating assets.

Impact of Revenue Deficit

Revenue deficit has the following impacts on the economy −

• Reduction in assets − Assets must be sold to meet the shortfall in the revenue deficit. So, the government assets deplete due to revenue deficits.
• Inflation − It leads to inflation in the economy as more money has to be pumped into the economy by the central bank.
• Greater debt − An increased amount of borrowing means a greater debt burden on the economy.

Remedial Measures for Revenue Deficit

Governments can take the following remedial statuses for reducing the revenue deficit.

• Reduce unnecessary spending
• Raise the rate of taxes and apply new taxes wherever possible

Primary Deficit

The Gross Primary Deficit is the Gross Fiscal Deficit minus interest payments. Net Primary Deficit is Net Fiscal Deficit minus net interest payments. The net interest payment is the interest paid to deduct the interest receipt.

A contracting primary deficit indicates improvement toward fiscal health. The Budget document usually mentions the primary deficit as a percentage of GDP. This helps to facilitate comparison and get a proper perspective. Prudent fiscal management usually requires the government to not borrow to consume in the normal course.

The primary deficit is the fiscal deficit of the current year that is subtracted by the interest payments pending on previous borrowings. In simpler words, the primary deficit is the net requirement of borrowing minus the interest payment.

The primary deficit is the expenses that the borrowings are going to fulfil while not opting to pay the income interest payment. A zero primary deficit means there is a requirement for credit or borrowing for clearing the pending interest payments.

The formula for the primary deficit is

Primary deficit = Fiscal deficit – Interest payments

Remedial measures to contain primary deficits are similar to those of fiscal deficits. As the primary deficit is fiscal deficit minus interest payment, the nature of the primary deficit is similar to that of a fiscal deficit.

India’s Current State of Fiscal Deficit

The current fiscal deficit of the government was at 8.2 percent of the Budget Estimate (BE) of 2021-22. In real terms, the deficit was at Rs 2,03,921 crore at the end of May, according to the data released by the Controller General of Accounts (CGA).

The country's fiscal deficit is now projected at 6.4 percent of the GDP for the current fiscal ending March 2023 as against 6.71 percent for the last year. As per the data, the total receipts of the government at the end of May were Rs 3.81 lakh crore, or 16.7 percent of the BE for 2022-23. The collection was about 18 percent of the BE of 2021-22 in the corresponding period last fiscal.

In May, the tax (net) revenue was at 15.9 percent of the BE of 2022-23. It was 15.1 percent of the BE 2021-22 in the last year period. In real terms, the net tax revenue was Rs 3,07,589 crore in April-May 2022-23 period.

As per the data, the central government's total expenditure at the end of May was Rs 5.85 lakh crore, or 14.8 percent of this year's BE. It was 13.7 percent of the BE in the corresponding period.

For 2022-23, the fiscal deficit is estimated to be Rs 16,61,196 crore.

Conclusion

A budget deficit is an indispensable tool to check the growth of an economy and hence governments use it extensively to show the estimates and projected growth of the nation’s economic status. Obviously, no government wants to have a budget deficit, but sometimes, deficits may not be avoided. In general, governments must pay attention to the deficits in order to keep the economy on the right path.

The government can increase the taxes to reduce the deficit but too much tax is detrimental to the economy too. Disinvestment of unhealthy public sector players seems to be a good way but it also has some ill effects. Therefore, the government must find a better way to fill the gap so that the budget could avoid deficits.

FAQs

Qns 1. Which type of budget is the most common?

Ans. The fiscal budget is the most common among the budgets of different types.

Qns 2. State one way to reduce the revenue deficit.

Ans. Limiting unnecessary expenditures is a good way to reduce the revenue deficit.

Qns 3. What is the formula for calculating the primary deficit?

Ans. The formula for the primary deficit is −

Primary deficit = Fiscal deficit – Interest payments