Revenue Deficit definition: Revenue deficit arises when the government’s revenue expenditure exceeds the total revenue receipts. Revenue deficit includes those transactions that have a direct impact on a government’s current income and expenditure. This represents that the government’s own earnings are not sufficient to meet the day-to-day operations of its departments. Revenue deficit turns into borrowings when the government spends more than what it earns and has to resort to the external borrowings.
Revenue Deficit Formula: How is it calculated?
Here’s how the revenue deficit is calculated:
Revenue Deficit: Total revenue receipts – Total revenue expenditure.
Revenue Deficit deals only with the government’s revenue receipts and revenue expenditures.
Note that revenue receipts are receipts which neither create liability nor lead to a reduction in assets.
It is further divided into two heads:
- Receipt from Tax (Direct Tax, Indirect Tax)
- Receipts from Non-Tax Revenue
Revenue Expenditure is referred to as the expenditure that does not result in the creation of assets reduction of liabilities. It is further divided into two types
- Plan revenue expenditure
- Non-plan revenue expenditure
How is Revenue deficit met?
To overcome such a financial situation, the government can take these measures:
- Through the borrowings or sale of existing assets, the deficit could be met from the capital receipts.
- The government can increase its non-tax or tax receipts.
- The government could try to reduce unnecessary expenditures.
What does Revenue Deficit indicate?
Revenue Deficit is shown as a reference indicator in the Medium-term Fiscal Policy Statement (MTFP). The Revenue Deficit of the government has several implications, such as, it has to be met from the capital receipts, because of which a government either borrows or sells its existing assets. This brings in a reduction in assets.
Also, to meet its consumption expenditure, since the government uses capital receipts, it leads to an inflationary situation in the economy.
With more and more such borrowings, along with interest, the burden to repay the liability also increases which, in the future, results in huge revenue deficits.