Conservative budgeting – Fiscal space should be used carefully

Source: The post is based on an article “Conservative budgeting – Fiscal space should be used carefully” published in Business Standard on 11^th January 2023.

Syllabus: GS 3 – Indian Economy

Relevance: ways to use additional fiscal resources

News: The Union government is confident of achieving the fiscal deficit target of 6.4 per cent of gross domestic product (GDP) in the current fiscal year.

What has led the government in achieving the fiscal deficit target?

It is because of conservative budgeting at multiple levels. For example, the government budgeted for 9.6 percent growth in its tax revenue over the revised estimates for 2021-22.

However, the revised estimates calculated have grown by more than 23 per cent over the previous year.

Further, the government also assumed in nominal terms the Indian economy would grow by just about 11.1 per cent in the current fiscal year.

But, the first advance estimates for national income, released last week, show the economy is expected to grow by 15.4 percent this fiscal year.

This expansion in the economy gives the government additional space to spend while maintaining the required fiscal deficit as percentage of GDP leading to higher growth and tax collection.

However, underestimating growth and revenue collection can have an effect on overall expenditure efficiency but it is also a viable option.

How underestimating growth and revenue is beneficial?

Government has often struggled in the past to meet the fiscal-deficit target and ended up either reducing capital expenditure or shifting revenue expenditure outside the Budget. 

However, adopting such measures in the present situation where both the debt-GDP ratio and fiscal deficit are at higher levels could create risks.

Further, it is also hard to anticipate both expenditure and revenue collection with precision at the time of presenting the Budget. Therefore, it is sensible for the government to adopt a conservative approach in Budget making.

Moreover, the government can also adopt a few measures when it has more fiscal space available in the year.

What measures can be adopted by the government when it has more fiscal space?

1. a) reduce the deficit and aim to reach the stated medium-term fiscal targets as early as possible, b) deploy additional resources in building physical and social infrastructure, c) spend more on education and health, d) spend additional resources on defence.

However, to utilize its additional fiscal resources, the government needs to have a clear and transparent medium-term fiscal consolidation roadmap, else it may end up using additional fiscal space without any longer-term benefit.