A revenue deficit arises when the government’s revenue expenditure is more than its revenue receipts.
This means that the government’s own earnings are not enough for the day to day functioning of its departments.
Revenue expenditure includes all expenses that do not result in the creation of assets and revenue receipts are the income generated by the government through taxes and other sources.
When the revenue deficit is high, it indicates that the revenue earned by the government is not sufficient to meet the expenses required for essential government functions. This can be a cause for concern for economists, as it may indicate a lack of financial resources to support critical services.
To calculate revenue deficit, we can use the following formula:
Revenue deficit = Total revenue expenditure – Total revenue receipts.
Impact
- Reduced investment: A revenue deficit may make it more difficult for the government to fund infrastructure, education, and other growth-related initiatives, which could impede economic expansion.
- Privatisation: A revenue shortfall may force the sale of assets to raise money, which could have long-term effects on job losses and employment which further affects the government revenue.
- Taxation: When there is a revenue shortfall, taxes may be raised to make up the difference, which may have a variety of effects on the economy and society such as Taxes if they are too low to cover government spending cause a deficit and thus the government would not have money for public welfare.
- Credit rating: A large income shortfall may have an adverse effect on the government’s credit rating and, consequently, its capacity to borrow money at a favourable rate.
Suggestions
- Blocking tax Leakages: Governments can boost tax revenue by plugging in tax leakages and Tax Administration could be made more robust to bring in more money.
- Rationalize expenditure: In order to lower overall spending, governments can reduce or rationalize expenditures including subsidies, welfare programmes, and administrative costs.
- Privatisation: To generate income and cut costs, governments may sell off state-owned businesses or privatize some public services. Governments can also make money by renting or selling resources like land, buildings, and other assets. 43,000 hectares of vacant land is owned by Indian Railways.
- Encourage Investment: By offering incentives to investors, governments can foster an atmosphere that is favourable for investment, which could result in economic growth and greater tax income.
