A budgetary deficit is the amount by which the expenditures exceed the income in a certain year. Government Deficit refers to the amount of money in the established budget that is left over after the government expenditures have exceeded the amount of money in the set budget. Indicators of the economy’s financial health include the current account deficit and the trade deficit.

Deficit Reduction Scenario in India

• Due to the fact that indirect taxes are regressive in nature and have an equal impact on all income categories, the government has been attempting to increase tax collection by relying more heavily on direct taxes.
• The selling of shares in public sector undertakings (PSUs) is used to raise funds.
• Although there has been some progress in this area, the primary focus has been on reducing government expenditures through better programme planning and administration.

Suggestive Measures 

• Change the scope of government’s operations by withdrawing from some of the areas where it has previously operated (non-core government activities).
• As a result, curtailing government programmes in critical areas such as agriculture, education, health, poverty alleviation, and so on will have a negative impact on the economy.
• However, it must be remembered that greater deficits do not automatically reflect a more expansionary fiscal policy (aiming to boost income and output through increased government spending and reduced taxation) (aiming to increase income and output through increased government spending and reduced taxes).
• Depending on the status of the economy, the same fiscal policies can result in either a huge or a minor deficit.
• In the case of a recession in which GDP decreases, tax collections fall as well, because enterprises and families pay fewer taxes when they earn less income in the first place. In other words, even if fiscal policy is unchanged, the deficit rises in a recession and shrinks in a boom.

Fiscal Policy of the Government

It is the strategy by which the government changes its expenditure (spending) and tax rates in order to improve output and income while also attempting to stabilise the ups and downs in the economy, which is known as macroeconomic stabilisation.

The following are the ways in which changes in government spending and taxation policies have an impact on the running of the economy:

Changes in Government Expenditure

• Increased aggregate demand (AD) in the economy is achieved by maintaining tax rates at their current levels while increasing government consumption expenditure (GCE).
• Because of increasing government spending, the AD would surpass the supply of goods and services in the economy at the start of the expansion (as government expenditure forms a part of the AD).
• A disruption in the equilibrium would result as a result of the increased AD, and as a result, firms would increase their production in order to satisfy the increased levels of demand.
• This will shift the market equilibrium to a higher place than it was previously.
• This will boost the economy’s overall output capability as well as its overall income.
• As, under the concept of Circular Flow of Income if all income is spent on consumption then the total demand in the economy (AD) = Income (Y). Hence increased AD = Increased Y.

Changes in Taxes 

• Increasing disposable income across the board is made possible by tax reductions.
• The consumer spending of households will increase in proportion to the reduction in taxation as a result of the increase in disposable income of households.
• Modifications in government expenditure have a direct impact on the economy by increasing the AD; however, modifications in taxation have an impact on the economy indirectly through changes in the disposable incomes of families.

Proportional Income Tax 

A consistent fraction of one’s income is collected by the government in the form of taxes under the system of proportional income taxation. Because of the following reasons, this type of taxation functions as an automatic stabiliser:

• It reduces the sensitivity of disposable income and, consequently, consumer expenditure to variations in the GDP.
• When the GDP grows, disposable income grows as well, but by a smaller amount than the GDP growth since a portion of it is siphoned off as taxes. This helps to keep the growing trend in consumption spending from becoming too extreme.
• During a recession, when GDP declines, disposable income declines less quickly, and consumption does not fall as much as it would have otherwise if the tax liability had remained constant. As a result, the decline in aggregate demand is reduced, and the economy is stabilised.

Causes of High Fiscal Deficits 

• Decreased revenue realisation: Owing to the disruptions in normal business operations caused by the coronavirus epidemic and lockdowns
• Higher expenditure: The government’s pandemic relief efforts have resulted in a significant rise in revenue expenditure in the areas of food and public distribution, as well as rural development, which might be ascribed to this.

Reducing Fiscal Deficit

• The Fiscal Responsibility and Budget Management (FRBM) Rules, 2004, establish annual targets and require the central government to reduce the fiscal deficit by an amount equal to or greater than 0.1 percent of GDP per year, unless an exception is made by law.
• Fiscal consolidation can be achieved through increased tax buoyancy as a result of improved compliance on the one hand, and increased monetisation of the government’s assets, which include Public Sector Enterprises and land, on the other.

Conclusion 

The 2020-21 fiscal deficit target was 3.5 percent. In actuality, the deficit grew to 9.5 percent of GDP due to the COVID-19 pandemic’s twofold impact: low revenue due to the lockdown and slow economic development, along with substantial government spending to help the most vulnerable, as well as a stimulus programme to boost domestic demand.