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Fiscal Deficit

23rd May – Fiscal Deficit

Fiscal Deficit

Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure. It is a situation occurs when the government’s expenditure exceeds its income. This difference is calculated both in absolute terms and also as a percentage of the Gross Domestic Product (GDP) of the country. A recurring high FD means that the government has been spending beyond its means.

What is ‘Fiscal Deficit’?

The government describes it as “the excess of total disbursements from the Consolidated Fund of India, excluding repayment of the debt, over total receipts into the Fund (excluding the debt receipts) during a financial year”

Income and Expenditure of Government –

  1. Revenue receipts of the government – Corporation Tax, Income Tax, Custom Duties, Union Excise Duties, GST and taxes of Union territories. Note – GST or Goods and Services Tax which is collected by the Centre includes CGST (Central Goods and Services Tax), IGST (Integrated Goods and Services Tax) & GST Compensation Cess.
  2. Non-tax revenues – Interest Receipts, Dividends and Profits, External Grants, Other non-tax revenues, Receipts of union territories.
  3. Expenditure of Government – Revenue Expenditure, Capital Expenditure, Interest Payments, Grants-in-aid for creation of capital assets.

How is Fiscal Deficit calculated?

  • Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts)
  • If the total expenditure of the government exceeds its total revenue and non-revenue receipts in a financial year, then that gap is the fiscal deficit for the financial year.
  • The FD is usually mentioned as a percentage of GDP. For example, if the gap between the Centre’s expenditure and total income is Rs 5 lakh crore and the country’s GDP is Rs 200 lakh crore, the FD is 2.5% of the GDP.

What causes fiscal deficit?

  • Sometimes, the governments spend on handouts and other assistance to the weak and vulnerable sections of the society such as the farmers and the poor.
  • A high FD can also be good for the economy if the money spent goes into the creation of productive assets like highways, roads, ports and airports that boost economic growth and result in job creation.
  • The government meets FD by borrowing money. In a way, the total borrowing requirements of the government in a financial year is equal to the FD in that year.

SourceFinancial Express

QUESTION – What is ‘fiscal deficit’? Is it good for the country’s economy?

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