The government receipt and expenditure are the two components of a budget. In terms of the magnitudes of receipts and expenditure, there can be balance budget, deficit budget and surplus budget.
- When the government expenditure is exactly equal to its receipts, the government has balance budget.
- When the government expenditure exceeds its receipts, it is deficit budget.
- When the government revenue is greater than its expenditure, the government runs a surplus budget.
Balance budget → Total Budgeted Receipt = Total Budgeted Expenditure
Deficit budget → Total Budgeted Receipts < Total Budgeted Expenditure
Surplus budget → Total Budgeted Receipts > Total Budgeted Expenditure
Types of Budget Deficit
1. Revenue Deficit
It refers to the excess of total revenue expenditure of the government over its total revenue receipts.
Revenue deficit = Total Revenue expenditure – Total Revenue receipts
Revenue deficit = Total Revenue expenditure – (Tax Revenue + Non Tax Revenue)
2. Fiscal Deficit
Fiscal deficit is defined as excess of total expenditure over total receipts excluding borrowings during a fiscal year.
Fiscal deficit = Total budget expenditure – Total budget receipts excluding borrowings
Fiscal Deficit = (Revenue expenditure + Capital expenditure) – (Revenue Receipts + Capital receipts excluding borrowings)
Fiscal deficit shows the borrowing requirements of the government during the budget year. Fiscal deficit reflects the borrowing requirements of the government for financing the expenditure including interest payments.
Fiscal deficit = Revenue expenditure + capital expenditure – Revenue receipts – capital Receipts excluding borrowings
Fiscal deficit = Revenue expenditure + capital expenditure – Tax Revenue – Non Tax Revenue – recovery of loans – disinvestment
Fiscal deficit = Total borrowing requirement of the government
Fiscal deficit indicates the additional amount of financial resources needed to meet government expenditure. Two, it is an indicator of the increase in future liabilities of the government on interest payment and loan repayment. The government has to pay back the borrowed amount with interest in future.
Consequently, the government has to either borrow more from the people or tax people more in future to pay interest and loan amount.
3. Primary Deficit
Primary deficit is defined as fiscal deficit minus interest payments on previous borrowings. Primary deficit shows the borrowing requirements of the government for meeting expenditure excluding interest payment.
Gross Primary deficit = Fiscal deficit – Interest payments
Net Primary deficit = Fiscal deficit + Interest received – Interest payments
It shows the total amount that the central government needs to borrow.
Three Ways to Finance Deficit
There are three ways by which the central government finances deficit. These are:
- Borrowing from Public and Foreign Governments
- Withdrawing Cash Balances held with the Reserve Bank of India (R.B.I.)
- Borrowing from the Reserve Bank of India (R.B.I)
The Government ordinarily prefers to borrow either from its citizens or from foreign governments instead of withdrawing cash balances held with the R.B.I. or borrowing from it. The later two ways to finance deficit increase the supply of money. The increase in supply of money increases the prices in an economy.
On the other hand, borrowing domestically from public has no effect on the supply of money and consequently on prices because when government borrows, the money held by people is transferred to government with no change in the supply of money. However, the money supply would increase when government borrows from foreign countries.