Deficits and its types

• What is a government deficit?
• Types of deficit
• What is a revenue deficit?
• What is a fiscal deficit?
• What is a primary deficit?
• Difference between Fiscal Deficit and Revenue Deficit
• Difference between Primary Deficit and Revenue Deficit

• Deficit is the amount by which the
spending done in a budget surpass the
earnings.
• A government deficit is the amount of
money in the budget by which the
spending done by the government
surpasses the revenue earned by it.
• This deficit presents a picture of the
financial health of the economy.
• To minimise the deficit or the gap
between the expenses and the income,
the government may reduce a few
expenditures and also increase
revenue-initiating pursuits.
What is a government deficit?

Types of deficit
In this concept, students can learn about the government deficit and its measures.
There are several measures that apprehend a
government deficit, and they have their own
inferences for the economy, such as:

• A revenue deficit refers to the surplus of the government’s revenue
expenditure over the revenue receipts.
Revenue deficit = Revenue expenditure – Revenue receipts
• This deficit only incorporates current income and current expenses.
• A high degree of deficit symbolises that the government should
reduce its expenses.
• The government may raise its revenue receipts by raising income tax.
Disinvestment and selling off assets is another corrective measure to
minimise a revenue deficit.
What is a revenue deficit?

What is a fiscal deficit?
• A fiscal deficit is the distinction between the government’s total expenditure and
its total receipts, which excludes borrowing.
Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating
capital receipts)
• A fiscal deficit has to be financed by borrowing. Hence, it includes the total
borrowing necessities of the government from all the possible sources. From the
financing part,
Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing
from abroad

What is a primary deficit?
• A primary deficit is the amount of money that the government requires to borrow from the
interest payments on the formerly borrowed loans.
• We must take a note that the borrowing necessity of the government comprises interest
responsibilities on the collected amount of debt.
• The aim of quantifying the primary deficit is to concentrate on current fiscal imbalances.
• To attain an approximate borrowing on account of current expenses overreaching revenues, we
need to compute what has been known as the primary deficit. It is the fiscal deficit, the interest
payments.
Gross primary deficit = Gross fiscal deficit – Net interest liabilities
• Net interest liabilities comprise interest payments – interest receipts by the government on the
net domestic lending.

Difference between Fiscal Deficit and Revenue Deficit
Parameters Fiscal deficit Revenue deficit
Meaning
A fiscal deficit is the excess of budget
expenditure over budget receipts other
than borrowings.
A revenue deficit is the surplus of revenue
expenditure over revenue receipts.
Significance
It reflects the total government borrowings
during a fiscal year.
It reflects the inefficiency of the government to
reach its regular or recurring expenditure.
Formula
Budgetary deficit – Borrowings
Or
BE – BR excluding borrowings
(RE + CE) – (RR + CR excluding borrowings)
Revenue expenditure – Revenue receipts
Or
RE – RR

Difference between Primary Deficit and Revenue Deficit
Sources to Finance Fiscal Deficit:
The following are the two sources to finance fiscal deficit:
(a) Borrowings
• A fiscal deficit is accomplished by the borrowings from a commercial bank, internal sources like
public or from external sources such as international agencies like IMF, foreign governments, etc.
(b) Deficit financing (i.e., Printing new currency)
• The government can also borrow funds from RBI against its securities to meet the fiscal deficit.
Therefore, RBI issues new currency for this purpose.
• This process is recognised as deficit financing.

Difference between Primary Deficit and Revenue Deficit
Parameters Primary deficit Revenue deficit
Meaning
Primary deficit is referred to as the difference that
exists between the fiscal deficit of the current year
and the interest payment that was needed to be
paid in the previous fiscal year.
A revenue deficit is the excess of revenue
expenditure over revenue receipts.
Significance
It indicates the borrowing requirements of the
government for the purposes, excluding the
interest payment.
It reflects the inability of the government to meet
its regular and recurring expenditure.
Formula
Fiscal deficit – Interest payment
Or
BE excluding interest payment –
BR excluding borrowings
Or
(RE excluding interest payment + CE) –
(RR + CR excluding borrowings)
Revenue expenditure – Revenue receipts
Or
RE – RR

Deficits and its types

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