Definition: Fiscal Deficit refers to the financial situation wherein the government’s total budget exceeds the total receipts excluding borrowings made during the fiscal year. Thus, it can be expressed as:
Fiscal Deficit = Total Expenditure – Total Receipts Excluding Borrowings
Through Fiscal deficit, the government can determine the amount that needs to be borrowed in case it lacks adequate resources.
The fiscal deficit can occur even if the revenue deficit is not there if the following conditions prevail:
- Revenue budget is balanced, but the capital budget is in deficit.
- Revenue budget is in the surplus, and the capital budget is in deficit, and the deficit is more than the surplus.
Borrowings are the only way to finance the fiscal deficit, and this results into the following severe implications on the economy::
- The fiscal deficit could be financed only through borrowings and with more and more borrowings the debt obligations increases. The government has to repay the loan amount along with the interest that results into the increase in the revenue expenditure and as a result, the revenue deficit increases. Thus, this compels the government to resort to the external borrowings.
- The deficit often leads to the wasteful expenditure of the government that ultimately results in the inflationary pressures in the economy. Also, the government issues money from the RBI, that prints more currency, called as deficit financing and with more circulation of money in the economy the inflation persists.
- The money borrowed in the form of loan is not fully utilized since the government has to pay a part of it in the form of interest. Thus, the loan remains partly utilized.
- With the borrowings and repayment of liability, the growth of the economy slows down in the future.
Thus, the fiscal deficit is the amount of borrowings that government resorts to meet out its requirement and larger the deficit, the larger is the amount of borrowings and vice-versa.