Question

Explain the concept of ‘fiscal deficit’ in a government budget. What does it indicate?

Answer 1

Fiscal deficit refers to the difference between the total budget expenditure and total budget receipts of the government, other than the borrowings and liabilities. That is,

Fiscal Deficit = Budget Expenditure − Budget Receipts (other than borrowing and liabilities)

Fiscal deficit reflects the total borrowing and other liability requirements of the government.

Fiscal Deficit = Borrowings of the government + other liabilities of the government

Higher fiscal deficit implies higher borrowing requirements of the government. Higher borrowings can have serious implications for the government of a country. The main source of borrowings for a country is the central bank (RBI in case of India) from which the government borrows in the form of deficit financing (i.e. printing of new currency notes). However, deficit financing increases the circulation of money in the economy and thereby, causes inflation.

The government of a country can also borrow from the government of other countries or from international monetary institutions (such as the World Bank, IMF, etc.). Such a borrowing, however, is associated with economic and political interference and increases the dependence of the borrowing country on the lending country.

Besides, a higher borrowing mounts a burden on the future generations who become liable to repay the amount of borrowing and the interest thereon. Thus, it acts as a obstacle in the future economic growth and development of the country. Another major problem associated with a high fiscal deficit is that the country gets trapped in a cycle of debt (debt-trap).