Fiscal deficit stands for the difference between total government spending and total revenue (excluding borrowing). If this spending exceeds the income generated, a fiscal deficit will occur. A fiscal deficit occurs when the total government spending exceeds the income generated by the government (excluding borrowing). The deficit does not mean debt, but the addition of an annual deficit.
How is fiscal deficit calculated?
Fiscal Deficit = Total Expenditure (Revenue Expenditure + Capital Expenditure) ? (Revenue Receipts + Recoveries of Loans + Other Capital Receipts (all Revenue and Capital Receipts except loans taken))
This deficit is calculated by calculating the difference between total government spending and total government revenue for the fiscal year and it is expressed as a percentage of GDP.
Highlights
The government’s total fiscal deficit is the total expenditure, capital, and uncollected loans that exceed income (including external subsidies) and income from borrowed capital. The budget deficit is the result of events such as a surge in fixed investment and an income deficit. Investment is made to create long-term assets such as buildings, factories and infrastructure development.
The deficit serves as an indicator of how well the government manages its finances. A high recurring deficit means that the government has spent over budget. However, while deficits are found in almost every economy, fiscal surplus are fairly rare. When used to build roads, airports, infrastructure, etc., large fiscal deficits are not always negative because they generate long-term income. Fiscal consolidation refers to the actions taken by governments (national and local) to reduce budget deficits and debt accumulation.
Financing of Fiscal Deficits
There are two sources of funding to cover the fiscal deficit.
Loans: Internally from commercial banks or from external sources such as the IMF and other governments.
Deficit financing (i.e. printing new currency): Borrowing funds from RBI for its own securities (thus RBI printing new currency).
The government covers the deficit with loans, so total demand for government borrowing is equal to the year’s deficit.
