When the government spends more than it earns, a fiscal deficit is caused. The government is required to borrow money in the form of Treasury Bills or through a debt financing programme, to meet its responsibilities.
For example, if the government raises Rs 200 crore by selling bonds and also collects Rs 200 crore from taxes and other sources, this would be a balanced budget. On the other hand, if the council spends Rs 230 crore on public works projects and only raises Rs 190 crore in taxes, it will run a fiscal deficit of Rs 30 crore.
Fiscal deficit: Explanation
Difference between the government’s total expenditure and its total receipts is known as fiscal deficit. It describes a short-term deficit (tending to be one year or less) of a political entity (the government, state or province, etc.) and a long-term deficit (tending to be more than one year) of a company. A budget deficit occurs when the present value of future expenditures exceeds the present value of future receipts, with no increases in public debt due to inflation.
Capital expenditure is a major expenditure incurred by the government. It includes spending on research and development, building infrastructure such as roads and bridges, and assisting poor farmers, labourers, etc. with financial assistance. The deficit may occur due to a rise in capital expenditure requirements, higher taxation, or due to reduced income from taxes or dividends from government-owned companies.
Fiscal deficit: Calculation
The difference between the government’s total income and total expenditures is used to determine the fiscal deficit. Taxes, non-debt capital receipts and other types of revenue, excluding borrowings are all included in the government’s total income.
Total government expenditure (including both revenue and capital expenditure) – Total government income (from sources such as revenue and non-revenue receipts, loan recovery) = Fiscal Deficit
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