Explore Other Concepts Of Deficit

A fiscal deficit develops whenever expenses exceed revenues, imports outweigh exports, or liabilities beat assets in a financial sense. A deficit is the inverse of a surplus and is identical to a shortfall or loss. A deficit occurs when a government, organisation or individual spends more than it earns in a specific period, often a year.

Operating at a loss, either personal, professional, or governmental, will deplete any present buffer or raise any existing overall debt. As a consequence, many individuals assume that deficits cannot be sustained for a long duration. Let’s look at what a budget deficit is and what it means.

What exactly is a fiscal deficit? 

The term ‘fiscal’ applies to yearly government account statements, whereas the term deficit means shortage. In a nutshell, the fiscal deficit represents the difference between what a government spends and what it acquires. According to the Government of India, a fiscal deficit is defined as the “abundance of total expenditures from the Central Budget, excluding debt repayment, overall revenues into the Fund (excluding debt receipts) for a fiscal year.”

A fiscal deficit happens when a country spends more than it earns. This deficit can be measured both in real numbers and as a percent of the country’s GDP. A large and sustained budget deficit shows that the government has been overspending.

What causes governments to run deficits?

The debt is bigger during times of conflict. What is the underlying cause of the link between wars and budget deficits? Wars cost a lot of money. Consider the battles in Iraq and Afghanistan. Congress has already budgeted around $1 trillion for these wars, and a Congressional Budget Office assessment estimated that the battles would cost the United States approximately $2.4 trillion in total. 

There is a situation when government purchases grow due to a conflict. To support the struggle, the government can either raise taxes or issue government debt. Keep in mind that when the government runs a deficit to fund a war, it borrows from the general population. 

The intertemporal budget line of government serves as a reminder that, because future taxes eventually pay for government debt, the choice is genuinely between taxing households now or taxing them later. Deficits have historically been the preferred strategy: governments have opted to tax future generations to fund wars.

On the other hand, the famed British economist John Maynard Keynes claimed that fiscal deficits enable governments to acquire products and services that might help revive their economy, making deficits a helpful weapon for getting countries out of recessions. Proponents of trade deficits argue that they allow nations to get more commodities than they produce—at least for a time—and may also stimulate local sectors to become more internationally competitive. 

How is the fiscal deficit calculated?

The difference between the government’s total revenue or receipts and its total expenditures is used to determine the deficit. The corporate tax, income tax, customs duties, union excise duties, GST and union territory taxes, interest collections, dividends and earnings, foreign subsidies, other non-tax revenues, and union territory invoices are all elements of the government’s overall income. 

Formula for calculating fiscal deficit:

Fiscal deficit = Total expenditure – Total receipts excluding borrowings = Borrowing

The fiscal deficit is zero when borrowing is added to total receipts. Naturally, the fiscal deficit indicates the government’s borrowing needs. It should be mentioned that the safe fiscal deficit ceiling is regarded at 5% of GDP. Borrowing, once again, comprises accumulated not only debt, i.e. loan amount, but also interest on debt, i.e. loan interest. The balance left after deducting debt interest payments from borrowing is known as the primary deficit. 

Why is the fiscal deficit so crucial?

The fiscal deficit represents the government’s borrowing needs for the fiscal year. A higher budget deficit suggests that the government will borrow more. The size of the fiscal deficit represents the amount of spending for which the government must borrow money. For example, the fiscal deficit in the government budget projections for 2012-13 is ₹5,13,590 crore = ₹14,90,925 – ₹9,35,685 + ₹11,650 + ₹30,000, according to the budget summary in Section 9.18. Borrowing will pay around 18% of the costs.

The economic impact of the fiscal deficit

Economists and policy professionals disagree on the economic consequences of budget deficits. Some, including Nobel laureate Paul Krugman, argue that the government doesn’t spend enough money and that the slow recovery from the Great Recession of 2007 to 2009 was caused by Congress’s unwillingness to run greater deficits to raise aggregate demand. Many people seem to believe that fiscal deficits discourage private borrowing, distort capital structures and interest rates, decrease net exports, and result in higher taxes, rising inflation, or even both.

The fiscal deficit in India

India’s budget deficit in the fiscal year 2020-21 was 9.3% of GDP or ₹18.21 lakh crore. According to Fitch Ratings, India’s fiscal deficit this fiscal year may be lowered to 6.6% of GDP. The estimate is consistent with the government’s goal. The Indian government forecasts the current fiscal year’s deficit to be 6.8% of GDP or ₹15.06 lakh crore.

Conclusion

The capacity of the government to balance its revenues and expenditures is referred to as fiscal discipline. When fiscal discipline is not maintained, expenditures exceed income, resulting in a fiscal deficit (i.e. a public financing requirement) that must be financed by debt or monetary creation, both of which have long-term negative implications.

However, none of the preceding should be interpreted as any level of fiscal deficit or government borrowing is beneficial to economic growth and job creation. Higher scale deceit, or borrowing by the government, entails interest payments and increases the burden of the national debt.