A Business Encyclopedia

Revenue Deficit

Definition: The Revenue deficit refers to the financial position wherein the government’s revenue expenditure exceeds its total revenue receipts. This means that government’s own earnings are not sufficient to meet the day-to-day functioning of its departments and other provisions of services.

The revenue deficit is only concerned with the revenue receipts and the revenue expenditures of the government. Obviously, when the government spends more than what it earns has to resort to the external borrowings, thus the revenue deficit results into the borrowings.

Symbolically, such financial situation can be expressed as:
Revenue Deficit = Total Revenue Expenditures – Total Revenue Receipts

The government can take following remedial actions to overcome this financial situation:

  • The deficit could be met from the capital receipts, i.e. through the borrowings or sale of existing assets.
  • The government could increase its tax or non tax receipts, i.e. a higher tax rate could be levied especially on a rich class people or any new taxes could be imposed wherever possible.
  • The Government should try to curtail its expenses, especially the unnecessary expenditures.

The government’s revenue deficit has several severe implications, which are as follows:

  1. The revenue deficit has to be met from the capital receipts that forces a government to either borrow or sell its existing assets, which results in the reduction of assets.
  2. Since the government uses more of capital receipts to meet its consumption expenditure, leads to the inflationary situation in the economy.
  3. With more and more borrowings, the burden to repay the liability and the interest increases that results into larger revenue deficits in the future.

Note: It is to be taken into prime consideration, that revenue deficit includes only those transactions that have a direct impact on the government’s current income and expenditure.

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