Q. Which of the following is/are the typical consequences of the Revenue Deficit?
1. The government borrows to finance its investment and consumption requirements.
2. A higher revenue deficit creates a higher repayment burden on the government.
Select the correct answer using the code given below:
Answer: B
Notes:
Revenue Deficit
- The revenue deficit refers to the excess of the government’s revenue expenditure over revenue receipts Revenue deficit = Revenue expenditure – Revenue receipts
- The revenue deficit includes only such transactions that affect the current income and expenditure of the government
- When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.
- This will lead to a build-up of stock of debt and interest liabilities and force the government, eventually, to cut expenditure Since a major part of revenue, expenditure is committed to expenditure, it cannot be reduced.
- The revenue deficit is to be met from the capital receipt, which is through the borrowing and sale of assets Given the same level of fiscal deficit, a higher revenue deficit is worse than the lower one because it implies a higher repayment burden in the future not matched by the benefits via investment.
Source: Ramesh Singh
