Budget and Deficit

Budget as a National Policy Statement

• It is no longer enough for the budget to be merely a statement of receipts and expenditures; it has evolved into a significant national policy statement
• In addition to the budget, the Fiscal Responsibility and Budget Management Act of 2003 requires the preparation of three policy statements (FRBMA)
• Medium-term Fiscal Policy Statement: As part of this process, it establishes a three-year rolling target for specific fiscal indicators and investigates whether revenue expenditure can be financed by revenue receipts on a sustainable basis, as well as how productively capital receipts, including market borrowings, are being utilise
• Fiscal Policy Strategy Statement: It establishes the priorities of the government in the fiscal area, examines current policies, and provides justifications for any deviations from the norm in major fiscal initiatives
• Macroeconomic Framework Statement: It analyses the prospects for the economy in terms of GDP growth, the fiscal balance of the central government, and the current account deficit and surplus

Balanced, Surplus and Deficit Budget 

• Balanced Budget: The government has the authority to spend an amount equal to the amount of revenue it receives. In the event that the government is required to incur greater expenditure, it will be necessary to raise an equivalent amount of revenue in order to maintain a balanced budget
• Surplus Budget: A situation in which the amount of tax revenue collected exceeds the amount of expenditure that is necessary
• Deficit Budget: This is the most common situation, in which the government’s expenditure exceeds the amount of revenue raised by a significant margin

Measures of Government Deficit

In order to calculate the amount of a deficit (when spending exceeds revenue earned), several different methods can be used, each with its own set of implications for the overall economy

Revenue Deficit: 

• When the government’s revenue expenditure exceeds its revenue receipts, this is referred to as a revenue deficit

[Revenue deficit = Revenue expenditure – Revenue receipts]

• It is only those transactions that have an impact on the government’s current income and expenditure that are included in the revenue deficit
• In 2018-19, the revenue deficit amounted to 2.3 percent of GDP

Implications of Revenue Deficit on the Economy: 

• It implies that the government is reducing its own savings and is relying on savings from other sectors of the economy to finance a portion of its consumption expenditure
• As a result of this situation, the government will be forced to borrow in order to even finance its day-to-day consumption requirements, let alone borrow for capital expenditures like infrastructure
• Because of the high level of borrowing, the government will eventually face significant debt and interest payment obligations, which will force it to curtail spending
• Because a significant portion of revenue expenditure is committed expenditure (in the sense that payment obligations have already been created even before the actual payment is made, such as salaries of government employees), it is not possible to reduce revenue expenditure
• The government as a result reduces both productive capital expenditure and welfare expenditure on a regular basis
• The net result is lower growth and negative consequences for the general public

Fiscal Deficit:

• It is the difference between the total expenditure of the government and the total receipts of the government, excluding borrowing

[Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts)]

• Non-debt creating capital receipts are those that are not derived from borrowings and, as a result, do not result in the creation of debt (E.g.: Proceeds from the sale of Public Sector Undertakings)
• These non-debt-creating capital receipts are obtained by subtracting total capital receipts from all liabilities, including borrowing and other liabilities
• The fiscal deficit will have to be financed by borrowing in order to be closed. As a result, the total amount of borrowing required by the government from all sources is indicated
• This borrowing can also be calculated as follows: 

[Gross fiscal deficit = Net borrowing at home (Money directly borrowed from the public through debt instruments + indirectly from commercial banks through Statutory Liquidity Ratio) + Borrowing from RBI + Borrowing from abroad]

Implications of Fiscal Deficit:  

• It is a critical variable in determining the financial health of the public sector as well as the overall stability of the economic situation
• Clearly, revenue deficit contributes to fiscal deficit (Fiscal Deficit = Revenue Deficit + Capital Expenditure – capital receipts that are not used to repay debt)
• The fact that a large portion of the revenue deficit was included in the fiscal deficit indicated that a significant portion of the borrowing was being used to meet consumption expenditure needs rather than investment needs

Primary Deficit: 

• The purpose of measuring the primary deficit is to draw attention to current fiscal imbalances
• The primary deficit is calculated in order to obtain an estimate of the amount of borrowing that will be required due to current expenditures exceeding revenues. It is simply the difference between the fiscal deficit and the interest payments
• The total borrowing requirements of the government also include an amount incurred on account of interest payments on old, accumulated debt (loans)

[Gross primary deficit = Gross fiscal deficit – Net interest liabilities]

• Net interest liabilities are the difference between interest payments made by the government and interest received by the government on net domestic lending

Conclusion 

A budget deficit occurs when current costs exceed the country’s recurring revenue. To reduce the budget deficit, a country must reduce certain spending, increase revenue-generating activities, or do both. A budget surplus counteracts a budget deficit. In this instance, revenue exceeds current expenses, leaving the country with surplus funds. A budget is balanced when the inflows match the outflows.