Budgetary Deficit

A deficit budget is defined as a budget that promises more expenditure than revenue collection. Most governments worldwide prefer to maintain a budget statement that is a deficit budget. A surplus budget indicates that a government is earning more than investing in the public’s goodwill; therefore, governments prefer a budget deficit as a political tool. 

A budget deficit in an economy is defined as the difference between total expenses by the government and the total revenue generated. A budget deficit can have inevitable consequences on the economy that can lead to inflation. 

Deficit Budget

In India, at the beginning of each financial year, the country’s finance minister presents the “annual financial statement” before the parliament; in standard terms, we know this as the country’s annual budget. In the annual financial statement, the financial minister informs the parliament of the economic activities of the previous years and presents the plans and goals of the government for the upcoming financial year. In their statements, if the finance minister proposes higher expenditures than the total amount of receipts, such a budget is known as the deficit budget. Therefore, a deficit budget is when a government attempts to invest more in public expenditures than it expects to collect in revenues.

Types of Budget Deficits

Generally, a budget deficit is of the following three types:

• Fiscal Deficit

• Revenue Deficit

• Primary Deficit

Let us understand the definitions of these three kinds of the budget deficit.

Fiscal Deficit

• A fiscal deficit is defined as the difference between the total expenditure and total income of a government in a financial year.
• The fiscal deficit is a percentage value and is calculated with respect to the total gross domestic product (GDP) of the country.
• A high value of the fiscal deficit in the country’s budget deficit means that the government expenses are more than the revenue collection.
• A low value in the fiscal deficit means less expense by the government on the capital assets and represents a condition of slow growth.
• The governments form fiscal policies to maintain a balanced fiscal deficit.

Revenue Deficit Budget

• A revenue budget is defined as the part of the economy where the government’s income and revenue expenditure are evaluated.
• This evaluation gives the government’s revenue expenditure and receipts statement.
• If the balance out of these statements is a negative value, the revenue budget is considered a deficit budget or a revenue deficit budget.
• If the balance of the statement comes out to be positive, the revenue budget is considered a surplus budget or a revenue surplus budget.

Primary Deficit

• The primary deficit is the difference between the fiscal deficit in the current year and the total payment of interest on earlier borrowings.
• The primary deficit gives information about the borrowing requirements of the government.
• A low primary deficit shows a better fiscal condition of an economy.

The Consequence of Budget Deficit

The following are the consequences of the condition of the budget deficit:

• One of the major consequences of a budget deficit is high inflation.
• Inflation is defined as the rise in the prices of goods and services in an economy.
• A budget deficit leads to the fiscal policies that support inflation; for example, governments may try to supply more money into the market, which results in sudden inflation.

Calculating Budget Deficit

A budget deficit in a country can be calculated by using a simple formula. The formula for the calculation of the budget deficit is given by,

Budget Deficit = (Total expenditure by the government – The total income of the government)

In the above formula for a budget deficit, 

The total expenditure is given by the expenses of the government on the capital assets of the country, such as defence expenditure, investments in energy generation, investments in science and technological advances and research, expenses on healthcare infrastructure, and expenses on social security, such as subsidies and pensions to the old age population.

The government’s total income includes revenue generation from the taxes, income tax revenue, corporate tax revenue, goods and services tax (GST), revenues from certain excise duties, and other taxes.

Conclusion

A budget deficit is defined as the government’s total expenditure exceeding the total earnings. It is a part of the government’s fiscal policies. A budget deficit is generally of three types; fiscal deficit gives us information on the budget deficit in the percentage terms of the country’s GDP, a revenue budget deficit gives us information on expenditure on revenue and a primary deficit defines the deficit in interest payments. A budget deficit can have certain consequences, a major one being a rise in inflation.