Fiscal Deficit definition: Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure. A fiscal deficit 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 fiscal deficit means that the government has been spending beyond its means.
What do you mean by Fiscal Deficit?
The government describes fiscal deficit of India 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”.
What constitutes the government’s total income or receipts? It has two components revenue receipts and non-tax revenues.
1. Revenue receipts of the government
- Corporation Tax
- Income Tax
- Custom Duties
- Union Excise Duties
- GST and taxes of Union territories.
*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
Expenditures of the government:
- Revenue Expenditure
- Capital Expenditure
- Interest Payments
- Grants-in-aid for creation of capital assets
Fiscal Deficit formula: 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 fiscal deficit 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 fiscal deficit 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 fiscal deficit 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.
How is Fiscal Deficit met?
The government meets fiscal deficit by borrowing money. In a way, the total borrowing requirements of the government in a financial year is equal to the fiscal deficit in that year.