When a government spends more than it collects by way of revenue, it incurs a budget deficit. [More formally, it refers to the excess of total expenditure (both revenue and capital) over total receipts (both revenue and capital). From the 1997-98 budget, the practice of showing budget deficit has been discontinued in India.]
There are various measures that capture government deficit and they have their own implications for the economy.
- Revenue Deficit
- Fiscal Deficit
- Primary Deficit
The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts.
Revenue Deficit = Revenue Expenditure – Revenue Receipts
The revenue deficit includes only such transactions that affect the current income and expenditure of the government.
When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.
This situation means that the government will have to borrow not only to finance its investment but also its consumption requirements. This will lead to a build up of stock of debt and interest liabilities and force the government, eventually, to cut expenditure.
Since a major part of revenue expenditure is committed expenditure, it cannot be reduced. Often the government reduces productive capital expenditure or welfare expenditure. This would mean lower growth and adverse welfare implications.
Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.
Gross Fiscal Deficit = Total Expenditure
– (Revenue Receipts + Non-Debt Creating Capital Receipts)
- Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs.
The fiscal deficit will have to be financed through borrowing. Thus, it indicates the total borrowing requirements of the government from all sources. From the financing side –
Gross Fiscal Deficit = Net Borrowing At Home
+ Borrowing From RBI
+ Borrowing From Abroad
- Net borrowing at home includes that directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).
The fiscal deficit of the central government, after declining from 6.6 per cent of GDP in 1990-91 to 4.1 per cent in 1996-97 rose to 6.2 per cent in 2001-02 (Table 5.1). Under the constraint imposed by the FRBMA, the fiscal deficit as well as the revenue deficit have fallen to 4.1 per cent and 2.5 per cent respectively in 2004-05 (provisional figures). The increasing share of the revenue deficit as a proportion of the fiscal deficit (which was 49.4 per cent in 1990-91 but has increased to 79.7 in 2003-04) indicates the rapid decline in the quality of the deficit.
The borrowing requirement of the government includes interest obligations on accumulated debt. To obtain an estimate of borrowing on account of current expenditures exceeding revenues, we need to calculate what has been called the primary deficit.
It is simply the fiscal deficit minus the interest payments
Gross Primary Deficit = Gross Fiscal Deficit – Net Interest Liabilities
Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.
Bibliography : NCERT – Introductory Macroeconomics