Budget Deficit

Budget deficit, also known as government deficit, refers to the situation when the budget expenditure of the government are more than the budget receipts.

Concerning the budget of the government of India, there are three important types of budget deficit. These are:

1. Revenue Deficit 2. Fiscal Deficit 3. Primary Deficit

Let's learn more about them one by one.

1. Revenue Deficit

It is the excess of revenue expenditure over revenue receipts.

Revenue Deficit = Revenue expenditure - Revenue Receipts

therefore, RD = RE - RR when RE > RR

Here, RD = Revenue Deficit; RE = Revenue Expenditure; RR = Revenue Receipts

Implications of revenue deficit are as follows:

• Because of the revenue deficit, the government may have to cut its expenditure on several welfare programs in the country. This leads to a loss of social welfare.
  

• The government may have to raise funds through borrowings. This raises the liabilities of the government and lowers its creditworthiness.
  

• The government may have to go for disinvestment - selling its ownership of public enterprise. The ownership of public enterprise may be lost to foreign companies. Consequently, the economic control of foreigners may increase in the domestic country.
  

2. Fiscal Deficit

Fiscal deficit is the excess of total expenditure over total receipts (other than borrowings)

Fiscal Deficit = Total Expenditure - Total Receipts

Total expenditure = Revenue expenditure + Capital Expenditure

Total Receipts = Revenue Receipts + Capital Receipts

Therefore, FD = BE - BR other than borrowings, when BE > BR.

Here, FD = Fiscal Deficit; BE = Budget Expenditure; BR = Budget Receipts.

Implications of Fiscal deficit are as follows:

• Inflationary Spiral: Borrowing from RBI is often linked to an inflationary spiral in the economy. This is how it happens: Borrowing from RBI increases the money supply in the economy. An increase in money supply leads to an increase in the general price level. A persistent increase in the general price level over some time leads to an inflationary spiral.
  

• National Debt: Fiscal deficit leads to national debt. It hinders GDP growth because a significant percentage of national income is used up to pay past debts.
  

• Vicious Circle of high fiscal deficit and low GDP Growth: Constantly high fiscal leads to a situation where: (a) GDP growth remains low because of high fiscal deficit, and (b) fiscal deficit remains high because of low GDP growth.
  

• Crowding out: High fiscal deficit leads to crowding out effect. This is a situation when high borrowings by the government reduce the availability of funds for private investors. Accordingly, overall investments in the economy are reduced.
  

• Erosion of government credibility: A high fiscal deficit erodes the credibility of the government in the domestic as well as in the international money market. Credit Rating of the government is lowered. Thus, global investors start withdrawing their investment from the domestic economy. Thus GDP growth is reduced.
  

3. Primary Deficit

The primary deficit is the difference between fiscal deficit and interest payment.

While fiscal deficit shows the borrowing requirement of the government inclusive of interest payments on past loans, primary deficit shows the borrowing requirement of the government exclusive of interest payments.

Implications of primary deficit:

The implications of a primary deficit are similar to those of a fiscal deficit. The only difference is that the primary deficit does not carry the load of interest payments on account of past loans. Primary deficit just indicates the borrowing when: Current year expenditure > Current year revenue.

In conclusion, understanding the different types of budget deficits—revenue deficit, fiscal deficit, and primary deficit—provides valuable insights into the financial health of a government. Each type highlights specific areas where the government's spending exceeds its income, and the consequences can be far-reaching, from inflationary pressures to increased national debt, and even to the erosion of global investor confidence. By carefully managing these deficits, a government can ensure sustainable economic growth and avoid the pitfalls of excessive borrowing. Responsible fiscal policy is, therefore, critical for maintaining a stable and growing economy.