How Fiscal Deficit Affects the Common Man

The fiscal deficit is the difference between the government’s total revenue and total spending or government expenditure. It represents the total value of the government’s borrowing needs. Borrowings are not included in the overall revenue calculation. It is defined as the difference between government expenditure or total spending (including loans) and income (including foreign grants) and non-debt capital receipts. The fiscal deficit is also defined as the gross fiscal deficit (GFD). The net fiscal deficit is the gross fiscal deficit minus the central government’s net loan.

In most cases, a fiscal imbalance occurs as a result of either a revenue shortfall or a significant increase in capital spending. Long-term assets, such as buildings, factories, and other development, are created through capital investment. A deficit is often funded by borrowing from the country’s central bank or obtaining funds from capital markets by issuing various instruments such as treasury bills and bonds.

Macroeconomic indicators

The federal government, as well as several state governments, have chosen not to increase the amount of dearness allowance and dearness relief paid to employees and retirees. That explains why governments have raised taxes on petrol and diesel; given the enormous drop in oil prices, individuals are paying considerably more per litre than they should.

Interest rates tend to rise when governments borrow more to pay their budget deficits and amass more debt. The Reserve Bank of India (RBI) is attempting to lower interest rates, which has resulted in lower returns on bank fixed deposits (FDs). On a bigger scale, a rise in government borrowing raises the risk of rating agencies further reducing India’s credit rating. Everything from systematic investment plans (SIPs) to the value of the rupee against the US currency would be affected.

How fiscal deficit affects the common man

A bigger budget deficit is not only a problem for the government, but it also influences our finances. A fiscal deficit means the total amount of money borrowed by the government in one financial year to meet their extra expenditure commitment in both the accounts, the revenue account and the capital account.

There are many macroeconomic factors like fiscal deficit, current account deficit, interest rate, GDP growth rate, and inflation, but most of them do not affect the common people in the short run, and that is why we do not get bothered about them.

But these factors can affect the lives of common people in the long run either directly or indirectly. While a fiscal deficit indicates the difference between the total revenue of the government and the total expenditure of the government, it is not a cause for worry if a government is running a deficit per se. To finance its revenue and spending mismatches, as well as to finance investments, governments must run deficits.

The negative effects of high deficits are related to how they are funded and used. The budget deficit can be managed by borrowing domestically or abroad or by printing money. Excessive domestic debt can lead to interest rate tightening, while excess external debt can lead to a foreign debt crisis. Printing money fuels inflationary pressure.

High government expenditure negatively impacts savings, which in turn affects growth. Budget deficits lead to constraints on government spending on infrastructure. In such a situation, the government is unable to spend money to tackle issues such as lack of electricity and water, bad roads, inadequate rail network, badly undeveloped ports, etc. This, in turn, leads to uncompetitive local industries and causes the growth of indigenous industries, which are primarily labour-intensive.

On the other hand, the deficit limits subsidies to agriculture on which most of our rural economy is based. If the agricultural sector fails, the purchasing power of rural areas is directly affected, resulting in little demand for goods and services. This also affects the domestic industry. The government is trying to fill the funding gap with foreign investment, but at a cost.

As borrowers, we have to put the interests of our investors first, often at the direct or indirect cost of local industry or commerce. Ultimately, the combined effects of all three of these factors can lead to many local businesses failing and high unemployment. High unemployment eventually leads to social unrest.

Normally, a high budget deficit pushes down the actual effective exchange rate. Currency depreciation and high-interest rates usually cause high inflation. In addition, if a government tries to cover the budget deficit by printing new currencies, this will lead to an increase in the money supply in the economy. Inflation will rise as the supply of goods and services does not keep pace with the increase in the money supply.

This will have a direct impact on the general public. The ‘public-private-partnership’ concept was born as a result of a fiscal deficit and a pressing need for infrastructure investment. Simply put, it is the government’s use of its powers to allow private corporations to create infrastructure and subsequently recoup their investment through earnings from the general public over the next two or three decades. The influence of this type of public-private partnership is also felt by the most vulnerable members of society.

As a result, a high rate of fiscal deficit hurts the common man in the long run, either directly or indirectly. The common man is affected by it in many ways – some of them being unemployment, a low economic growth rate, lower investment (both foreign and domestic), lesser infrastructure development, higher interest rates, etc.

Conclusion

Fiscal Deficit is a term used in economics to understand the growth of a country. Fiscal Deficit is an important factor in understanding the current economic situation of a country and its common people. We define a country’s Fiscal Deficit as the difference between its total revenue and total expenditure. A high Fiscal Deficit could be common if the country is developing. But, if it remains for a long time, then it starts to affect the lives of common people by an increase in interest rates, infrastructure, etc.