What is a Fiscal Deficit?
- A fiscal deficit is a shortcoming in the income of a government as compared to its spendings. It is the difference between the total income of the government and the total expenditure incurred by it. This difference is filled by government borrowings.
- The situation for fiscal deficit occurs when a government is spending beyond its resources. One can calculate Fiscal Deficit, the contrast between the government's income and expenditure, either as an absolute amount of total dollars spent over income or as a percentage of the country's Gross Domestic Product (GDP).
- The total income of the state under fiscal deficit includes only taxes and other revenues. It ignores the money borrowed by the government.
- In simple words, Fiscal Deficit is the excess of total expenditure over total receipts of the country, which often means that fiscal deficit is equal to borrowings of the state.
Understanding the Fiscal Deficit
Like every household, the government also maintains a budget, but often to keep up with the advancements and growth, it spends more than its income by borrowing through different channels. The centre generally spends on assistance to the weaker sections of the society or any developmental project, and this spending can cause a fiscal deficit.
Although people consider Fiscal Deficit as an adverse event, if a country manages to sustain deficit spending, it can help in the development of the country. While many see Fiscal Deficit and Fiscal Debt as the same, the two terms are different concepts. The Fiscal Debt is the total debt piled up over many years of deficit spending.
Fiscal Deficit in equation form is as,
Fiscal Deficit = Total expenditure (Revenue expenditure + Capital expenditure) - Total receipts other than borrowings (Revenue receipts + Capital receipts except for borrowings)
How is the Need for Fiscal Deficit Met?
- The need for a fiscal deficit clears out by borrowing money. In India, the government controls its shortfall by borrowing from different sources like the Reserve Bank of India, public sector banks, overseas markets, the public, capital markets, etc.
- Fiscal Deficit is also known as Gross Fiscal Deficit to show estimated borrowings of the government.
