Government Budget Deficits – Meaning, Types, And Components

Government Deficit

A deficit is an amount by which the expenditures during a budget exceed the income. A Government Deficit is that the amount of cash within the set budget by which the govt expenditure exceeds the govt income amount. This deficit indicates the financial health of the economy. to scale back the deficit or the gap between the expenditures and income, the government may cut on certain expenditures and also increase revenue-generating activities.

Before we delve into such measures to catch up on the budgetary deficit, let’s brush our basics about government deficit generally. Typically, a deficit is often defined because of the amount of cash during a budget by which the entire expense of a government exceeds its total earnings. Notably, the deficit plays a vital role in determining the financial health of an economy. To elaborate, the lower the gap between total earnings and total expenses, the higher it’s for an economy positioned in terms of finances. In the present government deficit and its type, each year, certain adjustments are made to the budget to remedy such a situation. For instance, the government may plan to increase revenue-generating opportunities or may decrease certain expenses to scale back that gap.

The government tries to adopt correct measures that directly or indirectly tend to influence some components of their budget.

Two Types of Government Budget

  • Revenue Budget

It comprises revenue receipts and revenue expenditure. Under it, the Revenue receipts can be defined as income generated from all possible sources. Further, it is divided into two categories namely – tax revenue and non-tax revenue. Therefore, Tax revenues are raised through direct and indirect taxes, while non-tax revenues are collected as fees, penalties, grants, etc. On the other hand, revenue expenses are mostly incurred while maintaining the government’s operation every day and its several departments. Example of revenue Expenses on subsidies, agriculture, health education, defence, all fall under revenue expenses. Such expenses can further be categorized as planned or unplanned.

  • Capital Budget

Capital Budget consists of capital receipts and capital expenditure, where the end, i.e. capital expenditure, can be classified into two categories – planned and unplanned. Notably, capital receipts are earnings which serve to generate a mortgage or may lead to a reduction in its total share of assets. These earnings are mostly generated by raising loans, disposing assets, or recovering old loans. In the case of capital expenditure, money is normally spent on generating new assets. Purchasing machines, plots, equipment, etc. are suitable examples of capital expenditure.

Components of the Budget deficit 

  1. Revenues

A majority of revenue for national governments comes from income taxes, corporate taxes, consumption taxes, and social insurance taxes. And for non-governmental organizations and companies, the majority of revenues come from the sale of goods and services.

  1. Expenses
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Government spending on healthcare, infrastructure, defence, subsidies, pensions, and other items that contribute to the health of the overall economy are included in government expenses. While for non-governmental organizations and companies, investments include the amount that is allocated on daily operations and factors of production, including rent and wages.

Types of Government Deficit

There are different types of deficits in a budget based on the types of expenditures and receipts. Therefore, there are three concepts of the deficit, namely

  • Revenue Deficit
  • Fiscal Deficit
  • Primary Deficit

Revenue Deficit

The shortfall between the total revenue admitted to the total revenue expenditure is a revenue deficit.

Revenue deficit = the total revenue expenditure – the total revenue receipts

This deficit only covers current income and current expenses. A high value of the deficit means that the government should cut down on its expenditures. The government may raise its revenue receipts by increasing tax income. Disinvestment which means selling off assets is another corrective measure to reduce revenue deficit.

Some suitable Measures for Revenue Deficit

To cope up with the revenue deficit, the government may either decide to reduce notable expenses for an increase in its tax and non-tax receipts.

Let’s take a glance through the reformative measures against such a government deficit.

  • An increase in income tax
  • The imposition of new taxes
  • Controlling unnecessary expense
  • Selling of assets

Some Main Implications of Revenue Deficit are

1. Reduction of assets:

Revenue deficit means disserving on government account because the government has to make up the exposed gap by drawing upon capital receipts either by borrowing or through the sale of its assets (disinvestment).

2. Inflationary situation:

Since borrowed funds from a capital account are used to meet the general consumption expenditure of the government, it leads to an inflationary situation in the economy with all its ills. Thus, a revenue deficit may result either in expanding government liabilities or in the reduction of government assets. Remember, a revenue deficit refers to a burden in the future without the benefit arising from investment.

3. More revenue deficit:

Large borrowings to meet revenue deficit will raise debt load due to a repayment mortgage and interest payments. This may lead to larger and larger revenue deficits in the future.

Fiscal Deficit

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

The Fiscal deficit = Total Expenditure – Total Revenue

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

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

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

Some suitable Measures of Fiscal Deficit

Borrowing is a great way of resolving the problem of fiscal deficit. But, it should be recorded that the safe limit for such borrowing is said to be 5% of GDR.

The remedial measures are mentioned below –

  • Borrowing from domestic sources and external sources
  • Deficit financing for the printing of new currency notes
  • By decreasing expenses on public expenditure like major subsidies, LTC, bonus, etc.
  • Reducing non-plan expenses
  • By increasing revenue by broadening tax bases, emphasizing direct taxes, curtailing tax evasions
  • And by sale and restructuring of shares in units of the public sector

Some main Implications for Fiscal Deficit

1. Debt traps:

The fiscal deficit is financed by borrowing. And borrowing generates problems of not only –

  • payment of interest but also of
  • Repayment of loans.

As the government borrowing increases, its liability in the future to repay the loan amount along with v.ith interest thereon also increases. Payment of interest grows revenue expenditure heading to a higher revenue deficit. Finally, the government may be forced to borrow to finance even interest payments leading to the emergence of a vicious circle and debt trap.

2. Wasteful expenditure:

A high fiscal deficit commonly leads to wasteful and useless expenditure by the government. It can create inflationary- pressure in the economy.

3. Inflationary pressure:

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

4. Partial use:

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

5. Retards future growth:

Borrowing is a financial burden on future generations to pay loans and interest amounts which retards the growth of the economy.

Primary Deficit

What is the Primary Deficit?

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A primary deficit is the amount of money that the government requires to borrow separate from the interest payments on the previously borrowed loans. We should maintain a record that the borrowing requirement of the government holds interest responsibilities on the collected amount of debt. The purpose of quantifying the primary deficit is to focus on current fiscal imbalances. To achieve an expected borrowing on account of current spending overreaching revenues, we need to compute what has been known as the primary deficit. It is the fiscal deficit of the interest payments.

The Gross primary deficit = Gross fiscal deficit – Net interest liabilities

Importance of Primary Deficit

As fiscal deficit reflects the government borrowing requirements for financing the expenditure inclusive of interest payment, the primary deficit shows the borrowing requirements of the government for meeting its existing expenses other than interest payment. So, if the primary deficit is zero, then the fiscal deficit is equivalent to interest payment. It is not adding to existing loans. Thus it indicates how much government borrowing is going to meet expenses other than interest payments.

Some Implications of Primary Deficit

It intimates how much of the government borrowings are continuing to meet expenses other than the interest payments. The difference between fiscal deficit and primary deficit shows the number of interest payments on the borrowings made in the past. So, a low or zero primary deficit symbolizes that interest commitments have required the government to borrow.

Some Remedial Measures for Primary Deficit

A higher Primary Deficit reflects the number of new borrowings in the current year. Since this is the amount on top of already existing borrowings (Fiscal Deficit) similar measures can be taken to reduce the number of borrowings.

Overview of Fiscal Revenue and Primary Deficit

Parameters Revenue Deficit Fiscal Deficit Primary Deficit
Definition It is defined as the excess of revenue expenditure over revenue income. It is defined as the excess of total expenses over total receipt except for borrowings. The difference between fiscal deficit and loan interest payment is known as the primary deficit.
Importance Revenue deficit indicates the inefficiency of the government to meet its expenses with its sources of income. It indicates the total amount that needs to be borrowed in a financial year. It indicates the amount of money needed to be borrowed to meet requirements other than repayment of interest amount.
The Formula Revenue Deficit = Revenue expenses – revenue income Gross fiscal deficit = Total expenditure – (Revenue + non-debt creating receipts. The Primary deficit = Gross Fiscal deficit – Net Interest Liabilities

 Measures to Reduce Government Deficit

  •     Increased importance in tax-based revenues and suitable means to lessen tax avoidance.
  •     Disinvestment should be done where assets are not being used efficiently.
  •     Discount in subsidies by the government will also help reduce the deficit.
  •     Try and evade unplanned expenditures.
  •     Borrowing from domestic sources.
  •     Borrowing from external sources.
  •     A widened tax base may also help in reducing the government deficit.

Conclusion

In simple terms, a state where the budget expenditure exceeds the budget revenue receipts is known as a government deficit. The situation occurs due to a sudden shift in budget provisions. A controlled deficit situation prompts an economy to thrive.

 An uncontrolled government deficit may lead to a decline in the financial health of the economy. Planning of revenue and expenditure should be the agenda of the government such that the economy moves towards a balanced budget state.

FAQ (Frequently Asked Questions)

Q1. What are the types of Government Deficit?
A1. There are 3 main types of government deficit namely–

  • Revenue deficit
  • Fiscal deficit
  • Primary deficit.

Q2. What is Fiscal Deficit?
A2. When the government’s total expenses exceed its total income, excluding borrowing in a financial year it is known as Fiscal deficit. Therefore, it helps to calculate the total amount of money the government needs to borrow.

Q3. What is a Revenue Deficit?
A3. Such a deficit highlights the situation wherein the government’s revenue expenditure is more than its revenue receipts.

Q4. What is the Primary Deficit?
A4. The difference between the current year’s fiscal deficit and interest payments on previous borrowings is known as the primary deficit.

Q5. What are the advantages of a budget deficit?
A5. Some advantages of budget deficit are as follows:

  • It allows the government to carry out large infrastructure and development projects
  • It allows the country to invest in its military at the time of war or crisis
  • Deficit spending when done precisely might be a major inducement to economic growth.

Q6. Why is the fiscal deficit treated as a more important indicator than other deficits?
A6. It is by a fiscal deficit indicator that a government determines how to regulate its revenues and expenditures and which tool to implement in what measure —whether to increase taxes or increase borrowings or decrease expenditure or print money to meet excess expenses.

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