What is fiscal deficit?
A fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings.
It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included.
Fiscal deficit = Total expenditure – Total revenue (excluding borrowings)
What are components of the fiscal deficit calculation?
The fiscal deficit calculations are based on two components — income and expenditure.
Income component: The income component is made of two variables, revenue generated from taxes levied by the Centre and the income generated from non-tax variables. The taxable income consists of the amount generated from corporation tax, income tax, Customs duties, excise duties, GST, among others. Meanwhile, the non-taxable income comes from external grants, interest receipts, dividends and profits, receipts from Union Territories, among others.
Expenditure component: The government in its Budget allocates funds for several works, including payments of salaries, pensions, emoluments, creation of assets, funds for infrastructure, development, health and numerous other sectors that form the expenditure component.
How fiscal deficit differs from debt?
Deficit differs from debt, which is an accumulation of yearly deficits.
What is gross fiscal deficit (GFD)?
The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of recovery over revenue receipts (including external grants) and non-debt capital receipts.
What is net fiscal deficit?
The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.
What are the causes of fiscal deficit?
Generally fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.
How deficit is financed?
While a rising deficit is a challenge for the government in the long term, to balance it out in short-term macroeconomics, the government looks at market borrowings by issuing bonds and selling them in through banks. Banks buy these bonds with currency deposits and then sell them to investors. Government bonds are considered an extremely safe investment instrument, so the interest rate paid on loans to the government represents risk-free investment.
A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.
Is fiscal deficit – good or bad?
A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy.
How can the fiscal deficit be reduced?
The obvious way to reduce a budget deficit is to cut government spending. However this kind of fiscal tightening can cause lower economic growth, which in turn can cause a higher deficit as the government gets less tax revenue in a recession.
