Measures of Government Deficit: Revenue Deficit, Fiscal Deficit and Primary Deficit

What is Budgetary Deficit?

A Budgetary Deficit can be termed as the excess of the total government expenditure over the total revenue generated in a financial year. A budgetary deficit happens when the government spends more money than what is generated through revenue collection, including direct or indirect taxes. Based on the deficit incurred, has been divided into three forms, i.e., Revenue Deficit, Fiscal Deficit, and Primary Deficit.

1. Revenue Deficit

The revenue deficit refers to the excess of revenue expenditure over revenue income in a financial year. It mainly focuses on the revenue aspects of the government, like revenue expenditure and revenue income/receipts. Revenue deficits happen due to the insufficiency of the government’s funds to meet the expenditure.

Revenue Deficit = Revenue Expenditure – Revenue Receipts

Implications of Revenue Deficit

1. A higher revenue deficit indicates that the government should either cut short its expenditures or should increase its revenue income to meet the consumption demands.
2. A revenue deficit indicates the insufficiency of the government’s funds to meet regular and recurring expenditures within the proposed budget.
3. It indicates that the government is unable to save and is using the savings of other sectors due to the non-fulfilment of its consumption needs, which is hampering the savings of other sectors.
4. A revenue deficit implies that the government has to harm its capital receipts by either increasing its liabilities through borrowings or reducing its assets by disinvesting in them.
5. As capital receipts are being used to fulfil consumption requirements, the inflation rate starts to increase. The increase in borrowings also results in a burden on the government in terms of meeting the loan and interest payment amounts.

Measures to Reduce Revenue Deficit

1. The government should take steps to control or overcome the revenue deficit, with the first one being, a reduction in expenditure by the government. This can be done by avoiding the unnecessary or unproductive expenses that are being incurred.
2. The second thing that should be done is to increase the revenue income/receipt. This can be done through tax or non-tax methods.

2. Fiscal Deficit

The fiscal deficit refers to the excess of total expenditure over total receipts/income, excluding borrowings, in a fiscal year. It mainly focuses on the borrowings of the government. It is mainly used to explain and understand the budgetary development in India. Fiscal Deficits happen when the government spends more than it is supposed to.

Fiscal Deficit = Total Expenditure – Total Receipts (except borrowings)

OR

= (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Capital Receipts excluding Borrowings)

OR

= (Revenue Expenditure – Revenue Receipts) + (Capital Expenditure – Capital Receipts excluding Borrowings)

OR

= Revenue Deficit + (Capital Expenditure – Capital Receipts excluding Borrowings)

Implications of Fiscal Deficit

1. To meet financial needs, the government borrows money from the RBI. For this, the RBI issues new currency, which increases the supply of money in the economy, ultimately increasing the rate of inflation.
2. Due to continuous borrowing, the revenue deficit can rise, which further results in the rising of the fiscal deficit as well. This further results in the formation of a vicious cycle of debt for the country, resulting in a debt trap.
3. Foreign dependency increases as a result of an increase in the foreign borrowings of the government. 
4. It harms the development and growth of the country due to the increase in the number of borrowings, creating a burden on the upcoming generations.

Sources of Financing Fiscal Deficit

1. To reduce the fiscal deficit the government can start borrowing from domestic/internal and external sources like the market, small savings funds, state provident funds, external sector, and short-term funds.
2. The government could use the method of deficit financing; i.e., printing of new currency notes. This can cover payments on debts by issuing securities through the issue of new currencies by RBI. 

3. Primary Deficit

Primary Deficit is the difference between the fiscal deficit (total income – total expenditure of the government) of the current year and the interest paid on the borrowings of the previous year. It indicates the borrowing requirements of the government for the purposes, excluding the interest payment

                                                           Primary Deficit = Fiscal Deficit – Interest Payment

Implications of Primary Deficit

1. The primary deficit indicates the number of expenses, other than the interest payments, that are going to be met by government borrowings.
2. A low or zero primary deficit indicates that interest payment on previous loans has forced the government to borrow or get more loans.

Primary Deficit is the root cause of Fiscal Deficit

In recent years, interest payments in India have considerably increased, and the high-interest rates on past borrowings of the country have increased the fiscal deficit on a great level. Now, to reduce the fiscal deficit it is essential to reduce interest payments through repayment of loans as early as possible.

Example:

i) In a government budget, there is a Revenue Deficit of ₹25 Crores. If Revenue Receipts are ₹60 Crores and Capital Expenditure ₹140 Crores, then how much is the Revenue Expenditure?

ii) The interest payments as per the government budget during a year are ₹60 Crores. If the total borrowings of the government are estimated at ₹130 Crores, then how much is the primary deficit?

Solution:

i) Revenue Deficit = Revenue Expenditure – Revenue Receipt

Revenue Expenditure= Revenue Deficit + Revenue Receipt

Revenue Expenditure = 25 + 60 = ₹85 Crore

Revenue Expenditure = ₹85 Cr.

ii) Fiscal Deficit = 130 

Primary Deficit = Fiscal Deficit – Interest Payment

Primary Deficit = 130 – 60 = ₹70 Crore

Primary Deficit = ₹70 Cr.