The difference between total revenue (income) and total expenditure of the government is called as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included. In simple language - Fiscal deficit is defined as excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year. In simple words, it is amount of borrowing the government has to resort to meet its expenses. A large deficit means a large amount of borrowing. Fiscal deficit is a measure of how much the government needs to borrow from the market to meet its expenditure when its resources are inadequate. Formula for Fiscal deficit = Total expenditure - Total receipts excluding borrowings.
Generally fiscal deficit takes place due to either revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development. A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds. Importance: Fiscal deficit shows the borrowing requirements of the government during the budget year. Greater fiscal deficit implies greater borrowing by the government. The extent of fiscal deficit indicates the amount of expenditure for which the government has to borrow money.
A mismatch in the expected revenue and expenditure can result in revenue deficit. Revenue deficit arises when the government’s actual net receipts is lower than the projected receipts. On the contrary, if the actual receipts are higher than expected one, it is termed as revenue surplus. A revenue deficit does not mean actual loss of revenue. Revenue deficit signifies that government’s own earning is insufficient to meet normal functioning of government departments and provision of services. Revenue deficit results in borrowing. Simply put, when government spends more than what it collects by way of revenue, it incurs revenue deficit. Revenue deficit includes only such transactions which affect current income and expenditure of the government. Formula for Revenue deficit = Total Revenue expenditure - Total Revenue receipts
Let’s take a example and understand Revenue deficitIf a country expects a revenue receipt of Rs 100 and expenditure worth Rs 75, it can result in net revenue of Rs 25. But the actual revenue of Rs 90 is realised and expenditure is Rs 70. This translates into net revenue of Rs 20, which is Rs 5 lesser than the budgeted net revenue and called as revenue deficit. Remedial measures: A high revenue deficit warns the government either to curtail its expenditure or increase its tax and non-tax receipts Implications: Revenue deficit means spending beyond the means. The following are 3 main implications (i) Reduction of assets: Revenue deficit indicates dissaving on government account because government has to make up the uncovered gap by drawing upon capital receipts either through borrowing or through sale of its assets (disinvestment). (ii) Inflationary situation: Since borrowed funds from capital account are used to meet generally consumption expenditure of the government, it leads to inflationary situation in the economy with all its ills. Thus, revenue deficit may result either in increasing government liabilities or in reduction of government assets. (iii) More revenue deficit: Large borrowings to meet revenue deficit will increase debt burden due to repayment liability and interest payments. This may lead to larger and larger revenue deficits in future.
What is Current account Deficit (CAD)?
The current account deficit means the value of imports of goods / services / investment income is greater than the value of exports. In other words value of import is greater than value of export goods. It is also called as a trade deficit. Its importance 1) If a current account deficit is financed through borrowing it is said to be more unsustainable. This is because borrowing is unsustainable in the long term and countries will be burdened with high interest payments. 2) If you run a current account deficit, it means you need to run a surplus on the financial / capital account. This means foreigners have an increasing claim on your assets, which they could desire to be returned at any time. 3) A current account deficit, may imply that you are relying on consumer spending, and are becoming uncompetitive. This leads to lower growth of the export sector.
4) A Balance of payments deficit may cause a loss of confidence by foreign investors. Therefore, there is always a risk, that investors will remove their investments causing a big fall in the value of your currency (devaluation). This can lead to decline in living standards and lower confidence for investment.
What is Primary deficit? The primary deficit is defined as the difference between current government spending on goods and services and total current revenue from all types of taxes net of transfer payments. The deficit can be measured with or without including the interest payments on the debt as expenditures. Fiscal deficit-Interest payments. Formula Primary deficit = Importance Fiscal deficit reflects the borrowing requirements of the government for financing the expenditure inclusive of interest payments. As against it, primary deficit shows the borrowing requirements of the government including interest payment for meeting expenditure. Thus, if primary deficit is zero, then fiscal deficit is equal to interest payment. Then it is not adding to the existing loan.