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3 Types of Budget Deficits and

their Measures | Micro
Economics
There can be different types of deficit in a budget depending upon the
types of receipts and expenditure we take into consideration. Accordingly,
there are three concepts of deficit, namely

(i) Revenue deficit

(ii) Fiscal deficit and

(iii) Primary deficit.

Although budget deficit and revenue deficit are old ones but fiscal deficit
and primary deficit are of recent origin.

Each of them is analysed below:

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

Following are three types (measures) of deficit:

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:

Thus. main remedies are: (i) Government should raise rate of taxes especially on rich people and any new taxes where possible. Put in symbols: Revenue deficit = Total Revenue expenditure – Total Revenue receipts For instance. It is related to only revenue expenditure and revenue receipts of the government.50. Revenue deficit results in borrowing. It reflects government’s failure to meet its revenue expenditure fully from its revenue receipts.109 crore – Revenue receipts ^ 9. through borrowing and sale of its assets. a higher revenue deficit is worse than lower one because it implies a higher repayment burden in future not matched by benefits via investment. Simply put. revenue deficit includes only such transactions which affect current income and expenditure of the government. the shortfall of total revenue receipts compared to total revenue expenditure is defined as revenue deficit.Revenue deficit is excess of total revenue expenditure of the government over its total revenue receipts.424 crore (= Revenue expenditure Rs 12. (ii) Government should try to reduce its expenditure and avoid unnecessary expenditure. Alternatively.18.685 crore) vide summary of the budget in Section 9. i.86. The deficit is to be met from capital receipts.e. . it incurs 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 in government budget estimates for the year 2012-13 is Rs 3. Given the same level of fiscal deficit. Remedial measures: A high revenue deficit warns the government either to curtail its expenditure or increase its tax and non-tax receipts. Mind.35. when government spends more than what it collects by way of revenue.

Implications: Simply put. This results in borrowing. 2. A large deficit means a large amount of borrowing. (ii) Inflationary situation: Since borrowed funds from capital account are used to meet generally consumption expenditure of the government. Remember. it leads to inflationary situation in the economy with all its ills. This increases revenue expenditure leading to greater revenue deficit. it is amount of borrowing the government has to resort to meet its expenses. 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). Thus. In simple words. revenue deficit implies a repa3Tnent burden in future without the benefit arising from investment. revenue deficit means spending beyond the means. revenue deficit may result either in increasing government liabilities or in reduction of government assets. Fiscal Deficit: (a) Meaning: Fiscal deficit is defined as excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year. Fiscal deficit . This may lead to larger and larger revenue deficits in future. Loans are paid back with interest. (iii) More revenue deficit: Large borrowings to meet revenue deficit will increase debt burden due to repayment liability and interest payments.

35. fiscal deficit gives borrowing requirements of the government. If we deduct interest payment on debt from borrowing.685 + 11. amount of loan but also interest on debt. Let it be noted that safe limit of fiscal deficit is considered to be 5% of GDR Again.e. 90. the balance is called primary deficit. Clearly. i.e.925 – (9. Thus.650 + 30.. fiscal deficit gives the borrowing requirement of the government.000) vide summary of budget in Section 9. equal to borrowings. The extent of fiscal deficit indicates the amount of expenditure for which the government has to borrow money. fiscal deficit is zero. 13. 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.590 crore (= 14. fiscal deficit in government budget estimates for 2012-13 is Rs 5. Greater fiscal deficit implies greater borrowing by the government. In the form of an equation: Fiscal deficit = Total expenditure – Total receipts excluding borrowings = Borrowing If we add borrowing in total receipts. interest on loan. borrowing includes not only accumulated debt i. It means about 18% of expenditure is to be met by borrowing. Fiscal deficit = Total Expenditure – Revenue receipts – Capital receipts excluding borrowing A little reflection will show that fiscal deficit is. Implications: . Can there be fiscal deficit without a Revenue deficit? Yes.is a measure of how much the government needs to borrow from the market to meet its expenditure when its resources are inadequate.18. Importance: Fiscal deficit shows the borrowing requirements of the government during the budget year. in fact. For example.

This may cause inflationary pressure in the economy. It should be noted that safe level of fiscal deficit is . i. Payment of interest increases revenue expenditure leading to higher revenue deficit.. Only primary deficit (fiscal deficit-interest payment) is available for financing expenditure.e.(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. It can create inflationary pressure in the economy. As the government borrowing increases. (ii) Wasteful expenditure: High fiscal deficit generally leads to wasteful and unnecessary expenditure by the government. its liability in future to repay loan amount along with interest thereon also increases. it results in circulation of more money. (iv) Partial use: The entire amount of fiscal deficit. Ultimately. total expenditure over its total receipts excluding borrowings. (b) How is fiscal deficit met? (by borrowing). Since fiscal deficit is the excess of govt. (iii) Inflationary pressure: As government borrows from RBI which meets this demand by printing of more currency notes (called deficit financing). government may be compelled to borrow to finance even interest payment leading to emergence of a vicious circle and debt trap. (v) Retards future growth: Borrowing is in fact financial burden on future generation to pay loan and interest amount which retards growth of economy. therefore borrowing is the only way to finance fiscal deficit. borrowing is not available for growth and development of economy because a part of it is used for interest payment.

e. Thus. Its implication is that money supply increases in the economy creating inflationary trends and other ills that result from deficit financing. it is detrimental for the economy if it is used just to cover revenue deficit. deficit financing. LTC. public and commercial banks. (ii) Reduction in expenditure on bonus. it is an easy way to raise funds but it carries with it adverse effects also.. . On the contrary.g. 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. should be kept within safe limits. if at all it is unavoidable. (ii) Borrowing from external sources: For instance. Therefore. 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. (i) Borrowing from domestic sources: Fiscal deficit can be met by borrowing from domestic sources. It also includes tapping of money deposits in provident fund and small saving schems. etc.considered to be 5% of GDR. Fiscal deficit is advantageous to an economy if it creates new capital assets which increase productive capacity and generate future income stream. 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. leaves encashment. Is fiscal deficit advantageous? It depends upon its use. Measures to reduce fiscal deficit: (a) Measures to reduce public expenditure are: (i) A drastic reduction in expenditure on major subsidies. borrowing from World Bank.

(iii) More emphasis on direct taxes to increase revenue. we need to calculate primary deficit. To know the amount of borrowing on account of current expenditure over revenue.e. the balance is called primary deficit. Thus. (iv) Restructuring and sale of shares in public sector units. primary deficit indicates borrowing requirement exclusive of interest payment (i. We have seen that borrowing requirement of the government includes not only accumulated debt. If we deduct ‘interest payment on debt’ from borrowing.. Symbolically: Primary deficit = Fiscal deficit – Interest payments . In other words whereas fiscal deficit indicates borrowing requirement inclusive of interest payment. (ii) Tax evasion should be effectively checked. Thus.(iii) Austerity steps to curtail non-plan expenditure. zero primary deficits means that government has to resort to borrowing only to make interest payments. It shows how much government borrowing is going to meet expenses other than Interest payments. Primary Deficit: (a) Meaning: Primary deficit is defined as fiscal deficit of current year minus interest payments on previous borrowings. but also interest payment on debt. primary deficit is equal to fiscal deficit less interest payments. amount of loan). (b) Measures to increase revenue are: (i) Tax base should be broadened and concessions and reduction in taxes should be curtailed. 3.

it has realised the need to tighten its belt.19. primary deficit in Government budget estimates for the year 2012-13 amounted to Rs 1.759) vide budget summary in section 9. Then it is not adding to the existing loan.93. As against it.831 crore (= Fiscal deficit 5. a lower or zero primary deficits means that while its interest commitments on earlier loans have forced the government to borrow. Thus.590 – interest payment 3. Thus.13. (b) Importance: Fiscal deficit reflects the borrowing requirements of the government for financing the expenditure inclusive of interest payments. It is generally used as a basic measure of fiscal irresponsibility. primary deficit is a narrower concept and a part of fiscal deficit because the latter also includes interest payment. .18. The difference between fiscal deficit and primary deficit reflects the amount of interest payments on public debt incurred in the past. then fiscal deficit is equal to interest payment. if primary deficit is zero.For instance. Thus. primary deficit shows the borrowing requirements of the government including interest payment for meeting expenditure.