Know More About Fiscal Deficit

The meaning of the word fiscal is related to the revenue generated by the government, especially taxes. The definition of the word deficit is a deficiency in the sum of money one has. A situation where a government generates less revenue than its expenditure is said to be a fiscal deficit.

We can calculate the gross fiscal deficit in terms of the extra money spent, or it can also be represented as a percentage of the gross domestic product (GDP). We have to also make sure that we do not confuse fiscal deficit with fiscal debt. Fiscal debt is the total amount of debt that has been accumulated due to the spending that occurred during the fiscal deficit.

Fiscal Deficit 

To understand the fiscal deficit, we must know that even though it may seem like a situation that negatively impacts the country’s economic conditions since the total expenditure is more than the total revenue generated by the government, it is not quite so. According to John Maynard Keynes, even though a country is spending money and putting itself in a fiscal deficit and incurring debt due to that deficit, it will help the country pull itself out of economic recession.

To calculate the gross fiscal deficit of a country, we can simply use the gross fiscal deficit formula, which is merely the difference between the country’s total revenue generated and the country’s total spending. We will have to exclude borrowed money from the total revenue generated. The formula is as follows:

Gross Deficit = total expenditure – total revenue generated

A physical deficit primarily occurs due to a significant hike in capital expenditure or a downfall in the revenue generated by the government.

Although the fiscal deficit may look like a negative indicator for the economy, it is not a bad thing in every case since it sometimes represents the government spending money on infrastructure, healthcare, and many other public services. It can also occur when a country is in recession and is trying to improve its economy, so it has to put itself in fiscal deficit and spend money on policies that will help the economy climb out of recession and increase revenue generation for the country.

The fiscal deficit in India for the year 2020-21 was 9.3% of the total GDP, or we can say it was Rs.18.21 lakh crore. Fitch’s rating stated that India could bring its physical deficit to 6.6% of GDP in 2021-22. This estimate is similar to the projections made by the government of India. For the next financial year, the government forecasted to bring down the fiscal deficit to 6.8% of the GDP or Rs.15.06 lakh crore.

Different Ways in Which the Government Generates Revenue

The government generates revenue through different means, but all of them are primarily taxes in one form or another. These means are as follows:

• Corporate tax: It is the tax imposed on a corporation’s income or profit.
• Income tax: It is a tax imposed on any type of income generated by businesses or individuals.
• GST or goods and services tax: It is the tax on any good or service that is sold within India for consumption.
• Custom duty: Custom duty is a type of tax paid while importing or exporting any good.
• Union excise duty: It is an indirect tax imposed on goods that are manufactured in India
• Interest receipt
• Dividend and profit
• External grants
• Receipts on union territory
• Other non-tax revenues 

Different Expenditures of the Government 

There are many ways in which the government spends the revenue generated. Expenditures of the government have the primary objective of the welfare of the people and improving the revenue generation to improve the economy and increase its speed of growth. Some of the expenditures of the government include

• Infrastructure
• Healthcare
• Research
• Investment
• Services
• Defence spending
• Payment of debt 

Conclusion

In this article, we have learned what the fiscal deficit is. A fiscal deficit is a situation when a government spends money more than it generates through different sources of its revenue.

A fiscal deficit is not always a negative indicator for an economy as it can at times indicate that a government is spending money to create infrastructure and better health care systems or any other public welfare issue to improve the economy and increase its revenue generation in the future. Sometimes, the government might put itself into a fiscal deficit in order to pull itself out of an economic recession.