What is a Fiscal Deficit?

5paisa Research Team Date: 25 Nov, 2022 03:53 PM IST

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Introduction

A common term discussed in the news and the economic world is Fiscal Deficit. But, what is meant by fiscal deficit? According to the fiscal deficit definition, it is a difference between a government’s total revenue and expenditure in a fiscal year. This phenomenon arises when the government spends beyond its reserves. Economists assume that a rising deficit is where they must start working on improving income or controlling expenditures. However, a fiscal deficit is different from fiscal debt. The former is not an adverse event; however, the latter is a critical situation for a country.  

This blog discusses fiscal deficit meaning, its calculation and the components involved.
 

How is the fiscal deficit calculated?

Calculating fiscal deficit is based on income and expenditure. The mathematical formula is:

Fiscal Deficit: Total Revenue Generated - Total Expenditure

(Total revenue includes revenue receipts, loans recovered, and other income receipts. The expenditures include everything except the money borrowed.) 

A fiscal deficit is common. However, a surplus is a rare event for any country. A high fiscal deficit is alarming for any economy. 
 

What are the components of the fiscal deficit calculation?

The components that affect the fiscal deficit of an economy are revenue generated and expenditures. 

Income component

This component includes the income earned by the government directly or indirectly. All taxable revenues and income generated from non-taxable variables affect the income component of the fiscal deficit. The taxable income consists of corporation tax, income tax, customs duties, excise duties, Goods and Service Tax (GST), and others. Meanwhile, the non-taxable income comes from external grants, interest receipts, dividends and profits, and receipts from the Union Territories (UTs).

In non-taxable income, components, such as interest receipts, and external grants. dividends, any other receipts from Union Territories (UTs), and profits are calculated together. 

Expenditure component

The government allocates funds for various sectors, such as salaries, emoluments, pensions, creation of assets, developments, health, infrastructure, and others. The amount spent under these allocations falls under the expenditure component. 
 

How is the fiscal deficit balanced out?

To control the imbalance, the government looks into market borrowings by issuing bonds and selling them to institutional investors. Government bonds or G-secs are considered an extremely safe investment instrument. Hence, the interest rate paid on loans to the government represents a risk-free investment. 

 

Fiscal deficit and Keynesian economics

Renowned economist John Maynard Keynes argued that fiscal deficits and debts incurred can aid countries resurfacing from economic recession. Many macroeconomists agree that the government needs to ramp up its spending in the event private players get apprehensive owing to an economic slowdown.  In the event of a market failure, economists may not advocate for a laissez-faire approach. This approach involves minimal government interference in public monetary affairs. 

Consider the recent pandemic-induced recession. During the first half of 2020, most economies experienced their deepest slump since the great depression of the 1930s. Governments across the globe spend exponentially to support their respective economies. Eventually, once things started stabilizing, the government reduced fiscal support. 
 

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