Q. With reference to the fiscal deficit, consider the following statements:
1.The fiscal deficit is primarily financed through taxes.
2.During an economic recession, a government deliberately increase its fiscal deficit to attract foreign investment.
3.Export earnings is a component of fiscal deficit.
4.Fiscal deficit is positively correlated with government borrowing.
How many of the statements given above are correct?
Explanation –
Statements 1, 2 and 3 are incorrect. Taxes are the primary source of government revenue, but they don’t directly finance the deficit. The deficit is financed by borrowing from various sources like bonds or loans. During an economic recession, a government might increase its fiscal deficit to stimulate the economy by increasing spending or cutting taxes. However, attracting foreign investment is not a direct result of an increased fiscal deficit. Export earnings are not a component of the fiscal deficit. The fiscal deficit is calculated as the difference between a government’s total expenditure and total revenue, which includes taxes, non-tax revenues, and borrowings. Export earnings, while contributing to a country’s economic growth and government revenue, do not directly form a part of the fiscal deficit.
Statement 4 is correct. Fiscal deficit is positively correlated with government borrowing. When a government runs a fiscal deficit, it needs to borrow funds to cover the shortfall between its expenditure and revenue. As the fiscal deficit increases, the government’s borrowing requirements also increase, leading to a positive correlation between the two.
Source: DNA
