Reviewed by Aug 16, 2023| Updated on
When the government spends more than its total income, such a situation is called a fiscal deficit. It is calculated by subtracting the total income from the total expenditure and is either expressed in absolute terms or as a percentage of the GDP (Gross Domestic Product).
Every time the government borrows money for spending beyond its earning, it is covering up the shortfall in the income compared with its spending. This shortfall or gap between the two is called the fiscal deficit.
It can occur due to a major rise in the capital expenditure required for creating long term assets or providing financial assistance to poor farmers, labourers and other vulnerable sections of the society. The government finances these deficits by borrowing money from the capital markets. They can do this by issuing bonds or from the central bank.
A high fiscal deficit every year hints that the government has been spending beyond its means. Economists need to keep an eye on the fiscal deficits to determine how much the government is exceeding its income.
We'll now take a closer look at the components that make up the total income of the government in the form of revenue receipts and non-tax revenues.
Components of revenue receipts a. Income tax b. GST and taxes of Union territories c. Custom duties d. Union excise duties e. Corporation tax
Sources of non-tax revenues a. Interest received through loan recovery b. Receipts of union territories c. Dividends and profits d. External grants e. Other non-tax revenues
The income generated from all these sources is then spent on capital expenditure, revenue expenditure, payment of interest and grants-in-aid (for creating capital assets) by the government and is termed as total expenditure.
Fiscal deficit can be calculated by finding the difference between the total income and the total expenditure done by the government. The total income of the government is calculated by including taxes, non-debt capital receipts and other forms of revenue except borrowings.
Fiscal Deficit = Total expenditure by the government (revenue and capital expenditure) - Total income of the government (loan recovery, revenue and non-revenue receipts)
For example, if the GDP of a country is ₹100 lakh crore and the difference between total income and expenditure is ₹10 lakh crore then the fiscal deficit is 10%.