Deficits

When a government spends more than it collects by way of revenue, it incurs a budget deficit. There are various measures that capture government deficit and they have their own implications for the economy.

Revenue Deficit

• The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts.
• Revenue deficit = Revenue expenditure – Revenue receipts.
• The revenue deficit includes only such transactions that affect the current income and expenditure of the government.
• When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.
• This will lead to a buildup of stock of debt and interest liabilities and force the government, eventually, to cut expenditure. Since a major part of revenue expenditure is committed expenditure, it cannot be reduced. Often the government reduces productive capital expenditure or welfare expenditure. This would mean lower growth and adverse welfare implications.

Fiscal Deficit

• Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.
• Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts).
• Non-debt creating capital receipts are those receipts which are not borrowings and, therefore, do not give rise to debt. Examples are recovery of loans and the proceeds from the sale of PSUs.
• The fiscal deficit will have to be financed through borrowings.
• Thus, it indicates the total borrowing requirements of the government from all sources. From the financing side.
• Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad.
• Net borrowing at home includes that directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR).

Primary Deficit

• Primary deficit is simply the fiscal deficit minus the interest payments.
• Gross primary deficit = Gross fiscal deficit – net interest liabilities.
• Net interest liabilities consist of interest payments minus interest receipts by the government on net domestic lending.