What is a Fiscal Deficit?

When a government presents expenses more significant than income in a given period, they are in a fiscal deficit. It occurs when a public administration fails to collect enough to meet its expenses. Read on to learn more about the fiscal deficit.

The fiscal deficit is the negative difference between public revenues and expenditures in a given period. It encompasses the consolidated public sector, the non-financial public sector, and the central government. This is the negative result of the state accounts. When government spending exceeds revenue, a deficit occurs.

Content

• How is deficit calculated?
• How is the deficit measured?
• Components of the fiscal deficit calculation
• Fiscal and budget deficit
• What to do about the fiscal deficit?
• Why is deficit significant for the economy?
• What does the Union Budget 2022-23 say about the deficit?

The fiscal deficit of a country can be calculated in two ways – 

1. As a percentage of its GDP

2. Total money spent by the government over its income. 

In either case, the income figure includes only taxes and other revenues. It excludes money borrowed to make up for the shortfall.

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How is fiscal deficit calculated (Mathematically)?

Mathematically, the deficit is calculated as follows – 

Fiscal deficit = [total revenue generated — total expenditure]

OR

Fiscal deficit = (Revenue expenditure + Capital expenditure) – (Revenue receipts + Capital receipts excluding borrowings)

While most countries continue to project a deficit in their economies, a surplus is rare. A high deficit sometimes emerges if the government is spending on developmental works. Works like the construction of highways, ports, roads, and airports later generate revenue for the government.

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How is the fiscal deficit measured?

Through national accounting, multiple criteria are applied related to payments and collections that a government incurs. The magnitude of this deficit is calculated according to the percentage of GDP it represents. For example, if a government presents revenues of Rs. 50,000 and expenses of Rs. 100,000, its public debt comes to exactly Rs. 50,000. Considering a GDP of Rs. 1,000,000, we can calculate what percentage of GDP the fiscal deficit represents, in this case being 5%.

The income obtained by the State comes from several sources:

• Taxes: personal income tax, wealth tax, real estate tax, or mechanical traction vehicle tax, among others.
• The sale of natural resources (oil, gas, or electricity).
• The loan of money to other countries. The income, in this case, comes from the interests that have been agreed upon with the borrowing country.

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This income is invested, in turn, in the following tasks (among many others):

• Human resources expenses 
• Investment in infrastructure and services (roads, airports, parks, education, health)
• Payment of interest on the debt that other countries have bought
• National security

Components of the Fiscal Deficit Calculation

There are two components of fiscal deficit calculations, which are as follows –

Income component: The income component comprises two variables –

a. The revenue coming from taxes levied by the Centre 

b. The income that comes from non-tax variables. 

The taxable income consists of the amount generated from –

• Corporate tax
• Income tax
• Customs duties
• Excise duties
• GST

Meanwhile, the non-taxable income comes from external grants, interest receipts, dividends and profits, and receipts from Union Territories, among others.

Expenditure component: In its Budget, the government allocates funds for several works. This includes payments of salaries, pensions, emoluments, creation of assets, and funds for infrastructure, development, health, and numerous other sectors. These components form the expenditure component.

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Fiscal deficit and budget deficit

When the finance ministry prepares the financial budgets, they have access to the data, with the help of which then can know in advance if there will be a deficit in the following period. In this situation, the government in question has a budget deficit. Now, it is essential to distinguish the difference between both concepts to avoid confusion. 

The budget deficit is the one that appears at the time of making the Budget (that is, there is a forecast that there will be a deficit, but it has yet to happen). In contrast, the fiscal deficit occurs when, in that period, the expenses of the government exceed its income (it’s happening, so it’s a fiscal deficit).

It is essential to mention that the public debt and the deficit are the worst enemies of development, so those underdeveloped countries cannot get out of this economic situation and continue to borrow.

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What to do about the fiscal deficit?

Generally, when a country fails to cover public expenditures with income derived from taxes and other sources, it has three ways of acting on it:

• Raise taxes.
• Issue new currency.
• Sell ​​public debt (within or outside the country).

The three measures can have consequences in the future and affect the economy. On the other hand, these measures must be accompanied by a reduction in public spending through budgetary control. This may involve the reduction of civil servants’ salaries or the elimination of certain services. In other words, all measures aimed at reducing public spending will surely be unpopular.

Also Read – Difference Between Provision and Reserve

Why is fiscal deficit significant for the economy? 

The importance of fiscal deficit depends upon its impact on the economy. On the one hand, many economists believe that fiscal deficits boost a sluggish economy since it increases the spending capacity of people. On the other hand, some economists believe that long-term deficits can negatively impact economic growth and stability.

The Union Budget presents any fiscal deficit most effectively. Since it can impact myriad factors like growth, market stability, production costs, and inflation, it can affect the country’s ratings if the deficit is significant.

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What does the Union Budget 2022-23 say about the fiscal deficit?

In the Union Budget 2022, Finance Minister Ms. Nirmala Sitharaman announced that the fiscal deficit for 2022-2023 is estimated to be 6.4%. 

This data is consistent with the broad path of fiscal consolidation announced in 2021-2022 to reach a fiscal deficit below 4.5% by 2025-26. The fiscal deficit for 2022-2023 is estimated because the Union Budget looks forward to a big push for capital expenditure of Rs 7.5 lakh crore for essential post-pandemic recovery.

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