What is Government Deficit?

Deficit is the amount by which the expends in a budget overreach the earnings. The
Government Deficit is the amount of money in the budget set by which the government
expend overreaches the government earning amount. This deficit furnishes a manifestation of
the financial health of the economy. To minimize the deficit or the gap between the expends
and income, the government may reduce a few expenditures and also rise revenue initiating
pursuits.

What is Revenue deficit?

The revenue deficit mentions to the surplus of government’s revenue expenditure over the
revenue receipts.

Revenue deficit = Revenue expenditure – Revenue Receipts

This deficit only incorporates current income and current expenses. A high degree of deficit
symbolizes that the government should reduce its expends. The government may raise its
revenue receipts by rising income tax. Disinvestment is selling off assets is another corrective
measure to minimize revenue deficit.

What is Fiscal Deficit?

Fiscal deficit is the distinction between the government’s total expend and its total receipts
and this excludes borrowing.
Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital
receipts)
The fiscal deficit has to be financed by borrowing. Hence, it manifests the total borrowing
necessities of the government from all the possible sources. From the financing part –

Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad

What is Primary Deficit?

A primary deficit is the amount of money that the government requires to borrow apart from
the interest payments on the formerly borrowed loans. We must make a note that the
borrowing necessity of the government comprises interest responsibilities on the collected
amount of debt. The aim of quantifying the primary deficit is to concentrate on current fiscal
imbalances. To attain an approximate of borrowing on account of current expends
overreaching revenues, we need to compute what has been known as the primary deficit. It is
the fiscal deficit – the interest payments.

Gross primary deficit = Gross fiscal deficit – Net interest liabilities

Net interest liabilities comprise of interest payments – interest receipts by the government on
net domestic lending.
Difference Between Fiscal Deficit and Revenue Deficit

Basis Fiscal Deficit Revenue Deficit

Meaning The fiscal deficit is the excess of Budget Revenue deficit is the surplus of Revenue
Expenditure over Budget Receipt other than Expenditure over Revenue Receipts.
borrowings.

Significance It reflects the total government borrowings It reflects the inefficiency of the
during a fiscal year. government to reach its regular or
recurring expenditure.

Formula Budgetary Deficit – Borrowings Revenue expenditure –Revenue receipts.

Or Or
BE – BR excluding Borrowings RE – RR
(RE +CE)–(RR+CR excluding borrowings)

Difference Between Primary Deficit and Revenue Deficit

Basis Primary Deficit Primary Deficit

Meaning · Primary Deficit is Fiscal Deficit net of Revenue deficit is the excess of revenue
Interest Payment. expenditure over revenue receipts.
· It is the difference between Fiscal Deficit and
Interest payment.

Significance It indicates the Borrowing requirements of the It reflects the inability of the
government for the purpose other than interest government to meet its regular and
payment. recurring expenditure.

Formula Fiscal deficit-Interest payment. Revenue expenditure – Revenue

receipts.
Or
Or
BE excluding interest payment –
RE – RR
BR excluding Borrowings
Or
(RE excluding Int. Payment + CE) –
(RR + CR excluding borrowings)
Sources to Finance Fiscal Deficit
Following Are the Two Sources to Finance Fiscal Deficit:
(a) Borrowings

 The fiscal deficit is accomplished by the borrowings from a commercial bank, internal
sources like public, etc. or from the external sources like International Agencies like
IMF, Foreign Governments, etc.
(b) Deficit Financing (I.e. Printing New Currency)

 The government can also borrow funds from RBI against its securities to meet the
fiscal deficit. Therefore, RBI issues new currency for this purpose.
 This process is recognized as Deficit Financing.

Deficit financing is the budgetary situation where expenditure is higher than the
revenue. It is a practice adopted for financing the excess expenditure with outside
resources. The expenditure revenue gap is financed by either printing of currency or
through borrowing.

Nowadays most governments both in the developed and developing world are
having deficit budgets and these deficits are often financed through borrowing.
Hence the fiscal deficit is the ideal indicator of deficit financing.

In India, the size of fiscal deficit is the leading deficit indicator in the budget. It is
estimated to be 3.9 % of the GDP (2015-16 budget estimates). Deficit financing is
very useful in developing countries like India because of revenue scarcity and
development expenditure needs.

Various indicators of deficit in the budget are:

1. Budget deficit = total expenditure – total receipts

2. Revenue deficit = revenue expenditure – revenue receipts

3. Fiscal Deficit = total expenditure – total receipts except borrowings

4. Primary Deficit = Fiscal deficit- interest payments

5. Effective revenue Deficit-= Revenue Deficit – grants for the creation of

capital assets
 6. Monetized Fiscal Deficit = that part of the fiscal deficit covered by
borrowing from the RBI.

Simply budget deficit is printing money to finance a part of the budget. In India,
there is no budget deficit at present. Hence one there is no budget deficit entry in
Government’s budget. Another absent deficit identity is monetized fiscal deficit.
This is borrowing by the government from RBI to finance the budget. Such a
borrowing practice is not adopted in India from 1997 onwards. Hence the monetized
fiscal deficit is also not there.

The leading deficit indicator and also the best one to measure the health of the
budget in the Indian context is fiscal deficit. The fiscal deficit represents borrowing
by the government. This borrowing is made by the government mostly from the
domestic financial market by issuing bonds or treasury bills.

The root factor that cause deficit in the budget is the revenue deficit. Revenue
deficit is the difference between revenue receipts and revenue expenditure in an
accounting sense.

In recent years, government is following another deficit term called effective

revenue deficit. Actually, revenue expenditure indicates expenditure to finance day
to day functions of the government. They are not productive. But according to the
government some revenue expenditure creates assets and hence is productive. This
revenue expenditure which creates assets is deducted to get Effective Revenue
Deficit.

The last type of deficit is Primary Deficit that shows the difference between fiscal
deficit and interest payments.

What is Government Deficit? A deficit is an amount by which the expenditures in a budget

exceed the income. A Government Deficit is the amount of money in the set budget by which
the government expenditure exceeds the government income amount. This deficit provides an
indication of the financial health of the economy. To reduce the deficit or the gap between the
expenditures and income, the government may cut back on certain expenditures and also
increase revenue-generating activities.

Revenue Deficit

Revenue deficit = Total revenue expenditure – Total revenue receipts

The shortfall between the total revenue received to the total revenue expenditure is revenue
deficit. This deficit only includes current income and current expenses. A high value of deficit
indicates that the government should cut down on its expenditures. The government may
increase its revenue receipts by increasing tax income. Disinvestment which means selling off
assets is another remedial measure to reduce revenue deficit.

Fiscal Deficit = Total expenditure – Total receipts excluding borrowings

A fiscal deficit is a gap by which government’s total expenditures exceed the government’s total
generated revenue. This, however, does not include the government borrowings.

it indicates the amount of money that the government will need to borrow during the financial
year. A greater deficit implies more borrowing by the government and the extent of the deficit
indicates the amount of expense for which the money is borrowed.

A huge disadvantage or implication of fiscal deficit is it may lead to a debt trap. Also, it may
lead to unnecessary and wasteful expenditure by the government. Increased fiscal deficit leads to
uncontrolled inflation. Borrowing is one way to reduce fiscal deficit. Another way is deficit
financing.

Primary Deficit = Fiscal deficit – Interest payments on previous loans

A primary deficit is the amount of money that the government needs to borrow apart from the
interest payments on the previously borrowed loans.

Deficit financing refers to the printing of new notes to increase cash flow in the system. The
fiscal deficit is a positive outcome if it leads to the creation of assets. It is detrimental to the
economic condition of the nation if it is used to simply cover revenue deficit.

Measures to Reduce Government Deficit

 Increased emphasis on tax-based revenues and appropriate measures to reduce tax

evasion.

 Disinvestment should be done where assets are not being used effectively

 Reduction in subsidies by the government will also help reduce the deficit.

 Try and avoid unplanned expenditures.

 Borrowing from domestic sources.

 Borrowing from external sources.

 A broadened tax base may also help in reducing the government deficit.
To summarize, a government deficit is a condition where the budget expenditure exceeds the
budget revenue receipts. This could be due to a sudden shift in budget requirements. A
controlled deficit situation causes an economy to grow.

An uncontrolled government deficit may lead to deterioration in the financial health of the
economy. The agenda of the government should be to plan the revenues and expenditures such
that the economy moves towards a balanced budget situation.

There can be different types of deficit in a budget depending upon the types of receipts and
expenditure we take into consideration.

Budgetary deficit is the excess of total expenditure (both revenue and capital) over total
receipts (both revenue and capital).

1. Revenue deficit = Total revenue expenditure – Total revenue receipts.

2. Fiscal deficit = Total expenditure – Total receipts excluding borrowings.

3. Primary deficit = Fiscal deficit-Interest payments.

1. Revenue Deficit:
Revenue deficit is excess of total revenue expenditure of the government over its total
revenue receipts. It is related to only revenue expenditure and revenue receipts of the
government. Alternatively, the shortfall of total revenue receipts compared to total revenue
expenditure is defined as revenue deficit.

Revenue deficit signifies that government’s own earning is insufficient to meet normal
functioning of government departments and provision of services. Revenue deficit results in
borrowing. Simply put, when government spends more than what it collects by way of
revenue, it incurs revenue deficit. Mind, revenue deficit includes only such transactions
which affect current income and expenditure of the government. Put in symbols:

Revenue deficit = Total Revenue expenditure – Total Revenue receipts

For instance, revenue deficit in government budget estimates for the year 2012-13 is Rs
3,50,424 crore (= Revenue expenditure Rs 12,86,109 crore – Revenue receipts ^ 9,35,685
crore) vide summary of the budget in Section 9.18. It reflects government’s failure to meet its
revenue expenditure fully from its revenue receipts.

The deficit is to be met from capital receipts, i.e., through borrowing and sale of its assets.
Given the same level of fiscal deficit, a higher revenue deficit is worse than lower one
because it implies a higher repayment burden in future not matched by benefits via
investment.

Remedial measures:
A high revenue deficit warns the government either to curtail its expenditure or
increase its tax and non-tax receipts. Thus, main remedies are:
(i) Government should raise rate of taxes especially on rich people and any new taxes where
possible, (ii) Government should try to reduce its expenditure and avoid unnecessary
expenditure.

Implications:
Simply put, revenue deficit means spending beyond the means. This results in borrowing.
Loans are paid back with interest. This increases revenue expenditure leading to greater
revenue deficit.

Main implications are:

(i) Reduction of assets:
Revenue deficit indicates dissaving on government account because government has to make
up the uncovered gap by drawing upon capital receipts either through borrowing or through
sale of its assets (disinvestment).

(ii) Inflationary situation:

Since borrowed funds from capital account are used to meet generally consumption
expenditure of the government, it leads to inflationary situation in the economy with all its
ills. Thus, revenue deficit may result either in increasing government liabilities or in
reduction of government assets. Remember, revenue deficit implies a repa3Tnent burden in
future without the benefit arising from investment.
(iii) More revenue deficit:
Large borrowings to meet revenue deficit will increase debt burden due to repayment liability
and interest payments. This may lead to larger and larger revenue deficits in future.

2. Fiscal Deficit:
(a) Meaning:
Fiscal deficit is defined as excess of total budget expenditure over total budget receipts
excluding borrowings during a fiscal year. In simple words, it is amount of borrowing the
government has to resort to meet its expenses. A large deficit means a large amount of
borrowing. Fiscal deficit is a measure of how much the government needs to borrow from the
market to meet its expenditure when its resources are inadequate.

In the form of an equation:

Fiscal deficit = Total expenditure – Total receipts excluding borrowings = Borrowing

If we add borrowing in total receipts, fiscal deficit is zero. Clearly, fiscal deficit gives
borrowing requirements of the government. Let it be noted that safe limit of fiscal deficit is
considered to be 5% of GDR Again, borrowing includes not only accumulated debt i.e.
amount of loan but also interest on debt, i.e., interest on loan. If we deduct interest payment
on debt from borrowing, the balance is called primary deficit.

Fiscal deficit = Total Expenditure – Revenue receipts – Capital receipts excluding borrowing

A little reflection will show that fiscal deficit is, in fact, equal to borrowings. Thus, fiscal
deficit gives the borrowing requirement of the government.

Can there be fiscal deficit without a Revenue deficit? Yes, it is possible (i) when revenue
budget is balanced but capital budget shows a deficit or (ii) when revenue budget is in surplus
but deficit in capital budget is greater than the surplus of revenue budget.

Importance: Fiscal deficit shows the borrowing requirements of the government during the
budget year. Greater fiscal deficit implies greater borrowing by the government. The extent
of fiscal deficit indicates the amount of expenditure for which the government has to borrow
money. For example, fiscal deficit in government budget estimates for 2012-13 is Rs 5,
13,590 crore (= 14, 90,925 – (9, 35,685 + 11,650 + 30,000) vide summary of budget in
Section 9.18. It means about 18% of expenditure is to be met by borrowing.

Implications:
(i) Debt traps:
Fiscal deficit is financed by borrowing. And borrowing creates problem of not only (a)
payment of interest but also of (b) repayment of loans. As the government borrowing
increases, its liability in future to repay loan amount along with interest thereon also
increases. Payment of interest increases revenue expenditure leading to higher revenue
deficit. Ultimately, government may be compelled to borrow to finance even interest payment
leading to emergence of a vicious circle and debt trap.

(ii) Wasteful expenditure:

High fiscal deficit generally leads to wasteful and unnecessary expenditure by the
government. It can create inflationary pressure in the economy.

(iii) Inflationary pressure:

As government borrows from RBI which meets this demand by printing of more currency
notes (called deficit financing), it results in circulation of more money. This may cause
inflationary pressure in the economy.

(iv) Partial use:

The entire amount of fiscal deficit, i.e., borrowing is not available for growth and
development of economy because a part of it is used for interest payment. Only primary
deficit (fiscal deficit-interest payment) is available for financing expenditure.

(v) Retards future growth:

Borrowing is in fact financial burden on future generation to pay loan and interest amount
which retards growth of economy.

(b) How is fiscal deficit met? (by borrowing).

Since fiscal deficit is the excess of govt. total expenditure over its total receipts excluding
borrowings, therefore borrowing is the only way to finance fiscal deficit. It should be noted
that safe level of fiscal deficit is considered to be 5% of GDR.

(i) Borrowing from domestic sources:

Fiscal deficit can be met by borrowing from domestic sources, e.g., public and commercial
banks. It also includes tapping of money deposits in provident fund and small saving schems.
Borrowing from public to deal with deficit is considered better than deficit financing because
it does not increase the money supply which is regarded as the main cause of rising prices.

(ii) Borrowing from external sources:

For instance, borrowing from World Bank, IMF and Foreign Banks

(iii) Deficit financing (printing of new currency notes):

Another measure to meet fiscal deficit is by borrowing from Reserve Bank of India.
Government issues treasury bills which RBI buys in return for cash from the government.
This cash is created by RBI by printing new currency notes against government securities.
Thus, it is an easy way to raise funds but it carries with it adverse effects also. Its implication
is that money supply increases in the economy creating inflationary trends and other ills that
result from deficit financing. Therefore, deficit financing, if at all it is unavoidable, should be
kept within safe limits.

Is fiscal deficit advantageous? It depends upon its use. Fiscal deficit is advantageous to an
economy if it creates new capital assets which increase productive capacity and generate
future income stream. On the contrary, it is detrimental for the economy if it is used just to
cover revenue deficit.

Measures to reduce fiscal deficit:

(a) Measures to reduce public expenditure are:
(i) A drastic reduction in expenditure on major subsidies.

(ii) Reduction in expenditure on bonus, LTC, leaves encashment, etc.

(iii) Austerity steps to curtail non-plan expenditure.

(b) Measures to increase revenue are:

(i) Tax base should be broadened and concessions and reduction in taxes should be curtailed.

(ii) Tax evasion should be effectively checked.

(iii) More emphasis on direct taxes to increase revenue.

(iv) Restructuring and sale of shares in public sector units.

3. Primary Deficit:
(a) Meaning:
Primary deficit is defined as fiscal deficit of current year minus interest payments on previous
borrowings. In other words whereas fiscal deficit indicates borrowing requirement inclusive
of interest payment, primary deficit indicates borrowing requirement exclusive of interest
payment (i.e., amount of loan).

We have seen that borrowing requirement of the government includes not only accumulated
debt, but also interest payment on debt. If we deduct ‘interest payment on debt’ from
borrowing, the balance is called primary deficit.
It shows how much government borrowing is going to meet expenses other than Interest
payments. Thus, zero primary deficits means that government has to resort to borrowing only
to make interest payments. To know the amount of borrowing on account of current
expenditure over revenue, we need to calculate primary deficit. Thus, primary deficit is equal
to fiscal deficit less interest payments.

Symbolically:
Primary deficit = Fiscal deficit – Interest payments

For instance, primary deficit in Government budget estimates for the year 2012-13 amounted
to Rs 1,93,831 crore (= Fiscal deficit 5,13,590 – interest payment 3,19,759) vide budget
summary in section 9.18.

(b) Importance:
Fiscal deficit reflects the borrowing requirements of the government for financing the
expenditure inclusive of interest payments. As against it, primary deficit shows the borrowing
requirements of the government including interest payment for meeting expenditure. Thus, if
primary deficit is zero, then fiscal deficit is equal to interest payment. Then it is not adding to
the existing loan.

Thus, primary deficit is a narrower concept and a part of fiscal deficit because the latter also
includes interest payment. It is generally used as a basic measure of fiscal irresponsibility.
The difference between fiscal deficit and primary deficit reflects the amount of interest
payments on public debt incurred in the past. Thus, a lower or zero primary deficits means
that while its interest commitments on earlier loans have forced the government to borrow, it
has realised the need to tighten its belt.