A fiscal deficit is the difference between the total expenditure and the total revenue (excluding borrowings) of the government.
Fiscal deficit is a financial term that describes the difference between the total expenses and the total income, excluding borrowings, in a given year. In simple terms, it represents the amount of money that a government needs to borrow to cover its expenses.
When the fiscal deficit is high, the government will need to borrow more money. The fiscal deficit provides insights into the financial shortfall that the government is facing when it does not have enough funds to cover its expenses.
Fiscal Deficit = Total expenditure – [Capital receipts other than borrowings and other Liabilities + Revenue receipts]
Impact of Fiscal Deficit
- Inflation: Large budget imbalance causes the government to make superfluous purchases, which could cause the economy to experience inflationary pressure. Also when the RBI prints more money to cover the deficit, a practice known as deficit financing, there is more money available on the market, causing inflation.
- Economic expansion: A large budget deficit may make it more difficult for the government to fund infrastructure and other growth initiatives, which could impede economic expansion because most of the money will be used to pay off debt.
- Exchange rate: Significant fiscal deficits can cause a nation’s currency to lose value, which can have an impact on investments and commerce abroad.
- Debt burden: A significant fiscal deficit may result in an increase in the nation’s debt, which may have long-term economic repercussions.
- Downgrade in credit: Due to a larger risk of defaulting on its financial obligations, a government’s credit rating may be reduced as a result of a fiscal imbalance, rendering it less creditworthy in the eyes of lenders and investors.
Suggestions
- Rationalize Public Expenditure: The government should Rationalize its overall spending to reduce the budget deficit. Like Reduction in bonuses, subsidies, and leave encashment. The government can cut back on additional payments and subsidies to save money.
- Tax increase: The government can raise taxes to generate more revenue and address budget shortfalls.The government can raise tax rates by changing tax brackets, enacting new taxes, or raising rates on already-enacted taxes. The government can improve compliance measures to lower tax evasion or widen the range of taxable activities or goods in order to enlarge the tax base. Tax exemptions can also be reduced or eliminated.
- Public sector unit disinvestment: The government can sell off or reduce its ownership in public sector companies to raise money and reduce its expenses. India decided to sell Air India by privatising the airline and giving the ownership to a private company, the Tata Group owned by Ratan Tata. The sales revenues were used to both raise money for the government and pay down debt.
