Measures of Government Deficit

What is the meaning of Government Deficit?

Usually, in most cases, a government’s expenditure is not equal to its earnings. This creates a gap between earnings and expenses. When the spending of the government exceeds income through revenues, a government deficit occurs. In other words, the government deficit is the amount that shows the gap between earnings and expenditure.

A government deficit is an indicator of the ‘ill health’ of an economy because it shows the expenses that have not been met by the government. Therefore, governments take many remedial steps to minimize the gap between earnings and expenses. Some of these steps include the introduction of revenue-generating activities or the removal of certain expenditures.

Types of Government Budget

While we talk about government deficits, it is worthwhile to discuss the types of government budgets. There are two types of government budgets which are the following −

Revenue Budget

Revenue budget is made up of revenue receipts and revenue expenses. Revenue receipts refer to all revenue-generating income while revenue expenses are the expenses made by the government to maintain and upkeep the nation’s various economic, financial, and general activities.

Revenue receipts are collected via tax and non-tax items. Tax revenues are earned by indirect and direct taxes while non-tax revenue is earned via fees, grants, and penalties. Revenue expenses are divided into planned and unplanned expenses. Some expenses made by the government include subsidies, and expenses for education, healthcare, defense, etc.

Capital Budget

The capital budget is made up of capital receipts and capital expenditures. Capital expenditure is again divided into - planned and unplanned expenditures. Capital receipts refer to various types of earnings that create liabilities. These receipts are commonly made through raising loans, recovering old loans, or disposal of assets.

Capital expenditures usually refer to expenses made to create assets, such as buying machinery, plots, equipment, etc.

Types of Government Deficits

Government deficits are divided mainly into the following three types.

Fiscal Deficit

Fiscal deficit refers to governments total expenditure exceeding its net income minus the net borrowing of the year. The fiscal deficit is a measure of the money a government needs to borrow to meet its expenditures. This measure is especially important when the economic conditions are not very good.

$\mathrm{Gross\:Fiscal\:Deficit\:=\:Total\:Expenditure\:-\:\lgroup\:Revenue\:Earning\:+\:Non-Debt\:Creating\:Receipts\rgroup}$

As total expenditure must be comparatively higher to get an increased gross fiscal deficit, an increased fiscal deficit means the government has to borrow more to meet its expenses. This may be unfavorable because the burden will grow with time and the government may get into a debt trap.

Implications of Fiscal Deficit

• Inflation − When the fiscal deficit is high, the government borrows money from the RBI. As a consequence, the RBI needs to print more money. This may increase inflation in the economy.

• Debt Trap − With a growing fiscal deficit, the government needs to borrow increasingly to meet current debt positions. This means that the government borrows more to meet each increasing and successive revenue deficit. Hence, a debt trap is created where the burdens go on increasing with time

• Dependence on foreign governments − When fiscal deficit increases, governments need to depend on foreign nations to meet their obligations. This may lead to dependence on foreign nations which may harm the long-term financial conditions of the economy.

• Negative impact on future growth − Borrowing acts as a major burden for future generations. It creates bottlenecks and stops the economy from flourishing as most of the revenue generated goes into meeting the debt requirements.

Revenue Deficit

Revenue deficit refers to an excess of revenue outflow than the income. When a government spends more in expenditure than its earnings, a revenue deficit takes place.

$\mathrm{Revenue\:Deficit\:=\:Revenue\:Expenses\:-\:Revenue\:Receipts}$

A revenue deficit bars governments from spending the required amount of funds in the various departments the government is involved. Moreover, a revenue deficit invites more borrowings. Therefore, as time elapses, the burden of revenue deficit goes up. This impacts future generations as they need to pay both the principal as well as interest on the loans already borrowed.

Implications of Revenue Deficit

• Inability to meet current expenses − A revenue deficit implies that the government is unable to meet its current and recurring expenditures in a given budget.

• Use of savings − A revenue deficit means that the government will use its savings to meet the expenses or borrowings.

• Use of capital receipts − A revenue deficit means that the government will use its capital receipts via disinvestments and borrowings. This in turn will reduce the assets and increase the liabilities.

• Inflation − The use of capital receipts or paying interest may lead to increased inflation in the economy. This will also increase the future burden.

• Inability to grow the revenues − A revenue deficit means that the government is unable to cut its expenditure and therefore cannot save funds for the future.

Primary Deficit

The primary deficit is the fiscal deficit minus the interest that needs to be paid for past borrowings. In other words, when we consider only the fiscal deficit for the current term removing the interests that need to be paid for the borrowings already made, we get the primary deficit.

Primary deficit shows the government the amount of money it has to borrow to meet the debt needs excluding the interest payments. Therefore, it is a measure of fiscal deficit that excludes interest.

$\mathrm{Primary\:Deficit\:=\:Fiscal\:Deficit\:-\:Loan\:Intrest\:Payments}$

Implications of Primary Deficit

Shows non-interest fiscal deficit: Primary deficit shows the fiscal deficit that does not include interest payments for the previously borrowed debt. In other words, it is the fiscal deficit that is free from interest requirements.

Shows the amount of interest paid in the past: The primary deficit shows the amount of money paid in interest in the past. As we have to deduct the interest from the total fiscal deficit, we need to calculate the interest that has been paid. This shows the total amount of interest that has been paid.

Conclusion

Economists have to keep an eye on government deficits because they show the expenditures and incomes of the government. As the intention is to reduce the gap between expenses and incomes, proper measures must be taken in a budget for this. That is why understanding the various types of budget deficits is so critical for them.

FAQs

Qns 1. What is meant by government deficits?

Ans. A government’s expenditure is not equal to its earnings. This creates a gap between earnings and expenses. When the spending of the government exceeds income through revenues, a government deficit occurs. In other words, the government deficit is the amount that shows the gap between earnings and expenditure.

Qns 2. How many types of government buffets are there?

Ans. There are two types of government budgets: revenue budget and capital budget.

Qns 3. How many types of budget deficits are there?

Ans. There are three types of budget deficits: primary deficit, fiscal deficit, and revenue deficit.