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Budget Deficit

ANKIT KUMAR

PGT, ECONOMICS

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Types of Budget

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During a year, government’s overall receipts may be equal to, less than, or more than its overall expenditure. So a Budget can be of three types:

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  1. Deficit Budget

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  • Surplus Budget

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  • Balanced Budget

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Budgetary Deficit

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Budgetary deficit is defined as the excess of total estimated Expenditure over total estimated Revenue.

Budgetary Deficit

Revenue Deficit

Fiscal Deficit

Primary Deficit

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Revenue Deficit

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  • Revenue deficit refers to Excess of Revenue expenditure over Revenue receipts during the given fiscal year.

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​

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  • Revenue Deficit signifies that government’s own revenue is insufficient to meet the expenditures on normal functioning of government departments and provisions for various services.

Revenue Deficit = Revenue Expenditure – Revenue Receipts

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Implication of Revenue Deficit

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  • It indicates the inability of the government to meet its regular and recurring expenditure.

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  • It implies that government is dissaving.

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  • It also implies that the government has to make up this deficit from capital receipts.

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  • Use of capital receipts for meeting the extra consumption expenditure leads to inflationary situation.

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  • A high Revenue deficit gives a warning to government to either curtail its expenditure or increase its revenue.

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Measures to reduce Revenue Deficit

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  • Reduce Expenditure

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  • Increase Revenue

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Fiscal Deficit

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  • Fiscal deficit refers to the excess of total expenditure over total receipts (excluding borrowings) during the given fiscal year.

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​

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  • The extant of fiscal deficit is an indication of how far the government is spending beyond its means.

Fiscal Deficit = Total Expenditure – Total Receipts excluding borrowings

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Total Receipts excluding Borrowings include:

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  • Revenue Receipts.

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  • Non-Debt creating Capital Assets.

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  • Non-debt creating capital receipts include all the capital receipts except the borrowings. So, such receipts do not give rise to debt.

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Fiscal Deficit

= Total Expenditure

- Total Receipts excluding Borrowings

Fiscal Deficit

= Total Expenditure

- (Total Receipts – Borrowings and other liabilities)

Fiscal Deficit

= Total Expenditure

- Total Receipts

+ Borrowings and other liabilities

Fiscal Deficit

= Budgetary Deficit

+ Borrowings and other liabilities

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Fiscal Deficit = Borrowings

​

  • The fiscal deficit will have to be financed through borrowings, therefore Fiscal Deficit = Borrowings.

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  • Thus, it indicates the total borrowings requirements of the Government from all the sources.

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Fiscal Deficit

= Total Expenditure

- Total Receipts excluding Borrowings

Fiscal Deficit

=

(

Revenue Expenditure

+

Capital Expenditure

)

Revenue Receipts

-

(

+

Non-debt creating Capital Receipts

)

Fiscal Deficit

=

Revenue Expenditure

+

Capital Expenditure

Revenue Receipts

-

-

Non-debt creating Capital Receipts

Fiscal Deficit

=

Revenue Expenditure

-

Capital Expenditure

Revenue Receipts

-

+

Non-debt creating Capital Receipts

Fiscal Deficit

=

Capital Expenditure

-

+

Non-debt creating Capital Receipts

Revenue Deficit

Relationship between Revenue Deficit and the Fiscal Deficit

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Implications of Fiscal Deficit

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The Implication of Fiscal deficit are as follow:

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  1. Debt Trap

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  • Inflation

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  • Foreign Dependence

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  • Hampers the future growth

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Sources of financing Fiscal Deficit

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Government has to look out for different options to finance the fiscal deficit. The main two sources are:

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  1. Borrowings

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  • Deficit Financing

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Comparison between Fiscal Deficit and Revenue Deficit

​

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Basis

Meaning

Indicator

It shows the excess of total expenditure over total receipts excluding borrowings.

It measures the total borrowing requirement of the government.

Fiscal Deficit

Revenue Deficit

It shows the excess of revenue expenditure over the revenue receipts.

It indicates inability of the government to meet its regular and recurring expenditure.

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Primary Deficit

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Primary deficit refers to difference between fiscal deficit of the current year and interest payments on the previous borrowings.

Primary Deficit = Fiscal Deficit – Interest Payments

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Implications of Primary Deficit

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  • It indicates, how much of the government borrowings are going to meet expenses other than the interest payments.

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  • The difference between fiscal deficit and primary deficit shows the amount of interest payments on the borrowings made in past.

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  • If primary deficit is zero, it means fiscal deficit is equal to interest payment.

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  • Primary deficit is the root cause of Fiscal Deficit.

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Comparison between Primary Deficit and Fiscal Deficit

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Basis

Meaning

Indicator

It shows the difference between fiscal deficit and interest payment.

It indicates the total borrowing requirements of the government, excluding interest.

Primary Deficit

Fiscal Deficit

It shows the excess of total expenditure over total receipts excluding borrowings.

It indicates the total borrowing requirements of the government, including interest.

Formula

Primary Deficit = Fiscal Deficit – Interest Payments.

Fiscal Deficit = Total Expenditure – Total Receipts excluding borrowings

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Union Budget Estimates for 2015-16

Amount in ₹ crores

1. Revenue Receipts 11,41,575

2. Capital Receipts (2a+2b+2c)

2a. Recovery of loans 10,753

2b. Other Receipts 69,500

2c. Borrowing and other liabilities 5,55,649 6,35,902

3. Total Receipts (1+2) 17,77,477

4. Plan expenditure (4a+4b)

4a. On Revenue Expenditure 3,30,020

4b. On Capital Account 1,35,257 4,65,277

5. Non Plan Expenditure (5a+5b)

5a. On Revenue Account 12,06,027

(it includes interest payments of ₹4,56,145 crores)

5b. On Capital Account 1,06,173 13,12,200

6. Total Expenditure 17,77,477

​

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Union Budget Estimates for 2015-16

Amount in ₹ crores

1. Revenue Receipts 11,41,575

2. Capital Receipts (2a+2b+2c)

2a. Recovery of loans 10,753

2b. Other Receipts 69,500

2c. Borrowing and

other liabilities 5,55,649 6,35,902

3. Total Receipts (1+2) 17,77,477

4. Plan expenditure (4a+4b)

4a. On Revenue Expenditure 3,30,020

4b. On Capital Account 1,35,257 4,65,277

5. Non Plan Expenditure (5a+5b+5c)

5a. On Revenue Account 12,06,027

(it includes interest payments of ₹ 4,56,145 crores)

5b. On Capital Account 1,06,173

13,12,200

6. Total Expenditure 17,77,477

Fiscal Deficit

= Total Expenditure

- Total Receipts excluding Borrowings

Revenue Deficit

= Revenue Expenditure

- Revenue Receipts

= 394472 Crores

- 1141575

= 1536047

= 1777477

- ( 1141575 + 10753 + 69500 )

= 555649 Crores

Primary Deficit

= Fiscal Deficit

- Interest Payments

= 555649

- 456145

= 99504 Crores

= 1777477

- 1221828

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ANKIT KUMAR

PGT, ECONOMICS

Thank

You