Notes on Revenue Deficit

Revenue is defined as the government’s total income or money generation or a business firm. The revenue deficit is defined as a situation where the government incurred more revenue expenditure than the revenue collection. The revenue deficit formula can calculate the revenue deficit. The revenue deficit can have adverse effects on the country’s economy; it can cause an insufficient credit balance for a country. The following article explains what is revenue deficit and gives detailed notes on its practicality in economics.

Revenue

Before understanding the concept of revenue deficit, let us first understand what revenue is? Revenue is an economic term for money generation; the revenue of a country or any business firm is defined as the total money generation. The revenue generation for the government or a firm does not add to the liabilities. Examples of the sources of revenue generation are tax incomes, non-tax incomes, as well as foreign grants given to a country.

Important Definitions

• Non-revenue: non-revenue income for any government or a business firm is money generation that does not add to the income. Non-revenue forms of money generation are added to the liabilities. An example of non-revenue generation is loans lent by other countries or organisations.

• Receipts: receipts are defined as every receiving of money by revenue or non-revenue forms of money generation. The sum of receipts is called the total receipts. The receipts represent all the income and non-income gains of the government.

• Revenue Receipts: generally, there are two types of revenue receipts:

• Tax revenue receipts: this includes all the government’s funds collected by the payments of the taxes such as GST and corporate taxes.

• Non-tax revenue receipts: this includes money and funds earned by the government through means other than the payment of taxes such as profits and dividends, interests on government loans, fiscal services, general services like banking, insurance, power distribution, irrigation and agriculture, etc., funds received in the form of fees, penalties and fines, grants by the foreign countries and organisations.

Revenue Expenditure

All the expenditure done by the government is generally of the following three kinds, 

1. Revenue expenditure
2. Current expenditure
3. Compulsive expenditure

Let us understand the revenue expenditure in this section. The following points can understand the revenue expenditure in India:

• Payments on interest by the government for domestic and international loans.
• Payments of salaries, subsidies, and pensions by the government.
• Payment of all the subsidies provided by the government.
• Investments in the defence sector by the government.
• Payments in the postal deficit of the government.
• Expenditures incurred for the maintenance of law and order.
• Expenditures are incurred on education, healthcare and all other social securities.
• Grants by the government to the states or a foreign country.

Revenue Deficit

In this section, let us understand what is revenue deficit. The revenue deficit is given when the total revenue receipts and the total revenue expenditure turn out to be in a negative value. The following points could be gathered from the revenue deficit:

• A condition of revenue deficit shows that the government is not earning as much as it is spending on the economy.
• The revenue deficit indicates that the government is running in revenue losses.
• Revenue deficit is not to be confused with the fiscal deficit; revenue deficit indicates that the revenue expenditure is more than the revenue collection; on the other hand, fiscal deficit shows the difference between the expenditure and the total income.

Revenue Deficit Formula

The revenue deficit formula can easily calculate the revenue deficit of a government. The revenue deficit formula gives,

Revenue Deficit = (Total revenue expenditure) – (Total revenue receipts)

Consequences of Revenue Deficit

As we have learned in previous sanctions, a revenue deficit is defined as a condition where the government is spending more revenue than it is collecting; however, the revenue deficit can have its disadvantages. The revenue deficit can have the following consequences:

• A high revenue deficit shows that the government bears many payments from different agents.
• To fulfil these payments, governments have to gather large loans.
• An unstable revenue deficit can lead to an adverse effect on credit listing.
• It can lead to the failure to reach the government’s financial obligations.
• Many government infrastructure plans may get sacrificed as the government will not have funds to sustain them.

Conclusion

When a government spends more on revenue expenditure and collects less revenue in return, this situation is called the revenue deficit. The government makes revenue expenditure by three means; the revenue expenditure, the current expenditure and the compulsive expenditure. The revenue deficit is calculated using the revenue deficit formula. It simply subtracts the total revenue expenditure from the revenue receipts.

A high revenue deficit is often considered bad for the economy, affecting government policies and credit balance. The above article explains what is revenue deficit and its implications.