What is budgetary deficit?
Budgetary deficit is the difference between all receipts and expenses in both revenue and capital account of the government.
Budgetary deficit is the sum of revenue account deficit and capital account deficit.
What is revenue account deficit?
If revenue expenses of the government exceed revenue receipts, it results in revenue account deficit.
What is capital account deficit?
If the capital disbursements of the government exceed capital receipts, it leads to capital account deficit.
How the budgetary deficit is expressed?
Budgetary deficit is usually expressed as a percentage of GDP.
What causes a budget deficit?
Both levels of taxation and spending affect a government’s budget deficit. Common scenarios that create deficits by reducing revenue and increasing spending include:
■ A tax structure that undertaxes high-wage earners but overtaxes low-wage earners.
■ Increased spending on programs like Social Security, Medicare, or military spending.
■ Increased government subsidies to targeted industries.
■ Tax cuts that decrease revenue but provide corporations with funds to increase employment.
■ Low GDP, or gross domestic product, results in lower tax revenue.
What are the effects of a budget deficit?
Budget deficits affect individuals, businesses, and the overall economy.
As the government takes steps to improve the deficit, spending for programs such as Medicare or Social Security may be curtailed. Improvements to infrastructure may also be affected.
To increase revenue, tax hikes may occur for high-income earners or large corporations, which may affect their ability to invest in new business ventures or hire new employees.
How the budget deficit can be reduced?
There are only two ways to reduce a budget deficit. either increase revenue or decrease spending.
Governments can only increase revenue by raising taxes or increasing economic growth. Tax increases are tricky. If they are too excessive, they will slow growth. Increasing growth can only be done moderately. If growth is faster than the ideal range , it will create a boom, which leads to a bust.
Cutting spending also has pitfalls. Government spending is a component of GDP. If the government cuts spending too much, economic growth will slow. That leads to lower revenues and potentially a larger deficit.
What is the best solution?
The best solution is to cut spending on areas that do not create many jobs.
PRACTICE QUESTIONS
QUES . There has been a persistent deficit budget year after year. Which of the following actions can be taken by the government to reduce the deficit? UPSC 2015
1 . Reducing revenue expenditure
2 . Introducing new welfare schemes
3 . Rationalizing subsidies
4. Expanding industries
Select the correct answer using the code given below.
(a) 1 and 3 only
(b) 2 and 3 only
(c) 1 only
(d) 1, 2, 3 and 4
(a) 1 and 3 only
