Fiscal Deficit

Introduction

A fiscal deficit situation occurs when the government’s expenditure exceeds its income. In other words, the fiscal deficit  is the difference between the total income of the government  and its expenditure. So, If Income is greater than the expenditure then it is called fiscal surplus and if the income is less than the expenditure, is called fiscal deficit. 

Fiscal Deficit Formula

The formula used for the calculation of Fiscal deficit is as follows:

Fiscal Deficit = Total expenditure of the government (Capital and Revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts)

Capital Expenditure: It is the expenditure on acquisition of assets like land, buildings, machinery, equipment, as well as investment in shares.

Revenue Expenditure: It is that part of the government expenditure which does not result in creation of assets. Revenue expenditure includes salaries of government employees, expenditure on welfare schemes, etc. 

Revenue Receipts: It is the receipt of the government that includes both tax revenue (like income tax, excise duty) and non-tax revenue (like interest receipts, profits).

Reasons for rising Fiscal Deficit

• Excess spending on several economic sectors
• Less collection of taxes
• Rising capital expenditure 
• Rising defence spending

Is slippage in Fiscal Deficit a good sign for the Indian Economy? 

• High and persistent fiscal deficit is one of the major macroeconomic problems in India since the mid-1980s. Fiscal consolidation is in the forefront of policy discussion in India not only at present but since the early 1990s. 
• However the actual administrative measure to control it constitutionally by enacting an Act took place in 2003 and the Fiscal Responsibility & Budget Management (FRBM) Act came into force in April 2004. The major reason behind controlling fiscal deficit is its adverse effect on the macro economy, particularly output growth. 
• Fiscal deficit to some extent is tolerable as it is more due to rapid investment  made by the government to develop infrastructure and to run various welfare schemes for the society. This needs more expenditure and investment which leads to deficit in the fiscal balance but fiscal deficit beyond a certain limit is also not a good sign for the economy as it brings more macroeconomic crisis.  

Major Impacts of Rising Fiscal Deficit

• If a country is in deficit, it indicates that the government’s earnings are less than the government’s expenses. So, as the country’s deficit rises, the macroeconomic situation becomes worse and   to keep the balance between them, the government has to rely on two things: Printing more currency or to seek more external borrowings. 
• As more money enters the system, it will lead to higher demand for goods and services leading to higher inflation. Moreover,  from next year onwards, the government would also have to pay interest on these borrowings which will in-turn put more pressure on the government to increase its receipts.

 Possible Ways to Control Fiscal Deficit 

• By increasing the tax base
• By Cutting Expenditure
• By adopting prudential expenditure norms
• By making taxation structure more convenient and simple