What is Fiscal Deficit & How to Calculate it

Fiscal deficit is estimated, accounting for all receipts and expenditures of the government. Fiscal deficit is the excess of total expenditure over the total receipt. The fiscal deficit is usually mentioned as a percentage of GDP.

For example, if the gap between the center’s expenditure and total income is. Rs.5 lakh crore and the country’s GDP is Rs.200 lakh crore, the fiscal deficit is 2.5 % of the GDP.

It is estimated as under:

Fiscal Deficit = Total expenditure ( Revenue expenditure + Capital expenditure ) – Total receipts other than borrowings ( Revenue receipts + Capital receipts other than borrowings )

FD = BE- BR other borrowings , when BE is more than BR other than borrowings

Here, FD = Fiscal deficit, BE = Budget expenditure, BR = Budget receipts

Fiscal deficit estimated as the difference between total expenditure and total receipts is often treated as Gross Fiscal Deficit.

As there are three sources of borrowing for the government, gross fiscal deficit is also estimated as under:

Gross Fiscal Deficit = (1) Borrowing from RBI + (2) Borrowing from abroad + (3) Net borrowing at home.

Revenue of a Government

For a government, the primary source of revenue is taxes. This includes Income Tax,  corporate tax, GST and other taxes and duties levied from time to time.

Additionally, there are some non- tax-based sources of revenue like interest income, dividends, and disinvestment receipts. There can also be more sources of revenue from time to time.

Expenditure of a Government

The Government of a country has several expenses to manage like capital expenditure, and revenue payments, interest payments, etc.

Calculation of Fiscal Deficit

Fiscal Deficit Formula = Total Expenditure – Total Receipts

Numerical example

Calculate Fiscal Deficit from the following data:

1.Revenue expenditure = Rs. 22,250 crore

2.Capital expenditure = Rs. 28,000 crore

3.Revenue receipts = Rs. 17,750 crore

4.Capital receipts ( net of borrowing) = Rs. 20,000 crore

Solution = Revenue expenditure + Capital expenditure – Revenue receipts –  

Capital receipts ( net of borrowing)

=  22,250 + 28000-17,750-20,000

= 12,500 crore

What causes Fiscal Deficit?

The fiscal deficit of a country is the result of :

  1. Revenue shortfall
  2. Increase in the government’s expenditure

In a country, the government has to take care of a lot of aspects. Hence, there are times when it has to spend more for the benefit of a certain section of society. This can lead to an increase in expenditure.

In fact, a fiscal deficit due to increase spending on infrastructure, employment generation, and the economic development of the country.

Usually, a fiscal deficit of less than 4% of the GDP is considered healthy for the Indian economy.

Ideal Fiscal Deficit – India

As a practice, the fiscal deficit is represented as a percentage of the country’s Gross Domestic Product. The fiscal deficit is expected to be around 7.5 % of its GDP in the financial year 2021.

Objectives of Fiscal Deficit

  1. Full employment
  2. Price stability
  3. Accelerating the rate of economic development
  4. Optimum allocation of resources
  5. Equitable distribution of income and wealth
  6. Economic stability
  7. Capital formation and growth

1. Full employment

The first and foremost objective of fiscal policy in a developing economy is to achieve and maintain full employment in an economy.

In such countries, even if full employment is not achieved, the main motto is to avoid unemployment and to achieve a state of near full employment.  

Therefore, to reduce unemployment and underemployment, the state should spend sufficiently on social and economic overheads.

These expenditures would help to create more employment opportunities and increase the productive efficiency of the economy.

2. Price stability

There is general agreement that economic growth and stability of joint objectives for underdeveloped countries. In a developing country, economic instability is manifested in the form of inflation.

Inflationary pressures are inherent in the process of investment but the way to stop them is not to stock investment.  They can be controlled by various other ways of which the chief is the powerful method of fiscal policy.

Therefore, in developing economies inflation is a permanent phenomenon where there is a tendency to rise in prices due to expanding trends of public expenditure.

As a result of rising in income, aggregate demand, and aggregate supply. Capital goods and consumer goods fail to keep pace with rising income.

3. Accelerating the Rate of Economic Growth

Primarily, fiscal policy in a developing economy should aim at achieving an accelerated rate of economic growth.

But a high rate of economic growth cannot be achieved and maintained without stability in the economy.

Therefore, fiscal measures such as taxation and deficient financing should be used properly so that product consumption and distribution may not adversely affect.

4. Optimum Allocation of Resources

Fiscal measures like taxation and public expenditure programs, can greatly affect the allocation of resources in various occupations and sectors.

As it is true, the national income and the per capita income of underdeveloped countries are very low.

In order to gear the economy, the government can push the growth of social infrastructure through fiscal measures.  

Public expenditure, subsidies, and incentives can favorably influence the allocation of resources in the desired channel.

5. Equitable Distribution of Income and wealth

It is needless to emphasize the significance of the equitable distribution of income and wealth in a growing economy.

Generally, inequality in wealth persists in such countries as in the early stages of growth, it is concentrated in few hands. It is also because private ownership dominates the entire structure of the economy.

Besides, extreme inequalities create political and social discontentment which further generate economic instability.

For this, a suitable fiscal policy of the government can be devised to bridge the gap between the incomes of the different section of the society.

6. Economic Stability

Fiscal measures, to a large extent, promote economic stability in the face of short-run International cyclical fluctuations.

These fluctuations cause variations in terms of trade, making the most favorable to the developed and unfavorable to the developing economies.  

So, for the purpose of bringing economic stability, fiscal methods should incorporate built-in flexibility in the budgetary system so that income and expenditure of the government may automatically provide a compensatory effect on the rise or fall of the Nation’s income.

Therefore, fiscal policy plays a leading role in maintaining economic stability in the face of internal and external forces.

7. Capital formation and Growth

Capital assumes a central place in any development activity in a country and fiscal policy can be adopted as a crucial tool for the promotion of the highest possible rate of growth formation.

A newly developing economy is encompassed by a vicious circle of poverty.

Therefore, balanced growth is needed to break down the vicious circle which is only feasible with a higher rate of capital formation.

Once a country comes out of the clutches of backwardness, it stimulates investment and encourages capital formation.

Therefore, fiscal policy must be designed to be performed in two ways -by expanding investment in public and private enterprises and by diverting resources from socially less desirable to more desirable investment channels.

Leave a Reply 0

Your email address will not be published. Required fields are marked *