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Monday, December 5, 2011

What is Fiscal Deficit?

One of the the most common deficits which often hits the headlines is fiscal deficit.
Fiscal deficit is the difference between government’s ‘total expenditure’ and ‘total revenue’ (devoid of the borrowing).

Fiscal Deficit= Government’s total Expenditure-Total Revenue Earned by the Government

Fiscal deficit is usually represented as the per cent of the GDP (Gross Domestic Product)

When total revenue earned by the government is more than its expenditure, it is called Fiscal surplus.

Fiscal surplus= Total Revenue- Total Expenditure

Government finances the fiscal deficit by various means- by borrowing from the Reserve bank, by issuing bonds and treasury bills, by disinvestment of PSU’s (Public Sector Undertakings)etc.

Fiscal deficit is caused by the revenue deficit and the capital expenditure done by the government.

Capital expenditure means expenses incurred in raising long term fixed assets like laying highways, constructing dams, raising ports and other infrastructure facilities.

Fiscal Deficit= Revenue Deficit+ Capital Expenditure
When we subtract interest paid (on borrowing) from the Fiscal deficit, resultant is called the Primary deficit.

Primary Deficit = Fiscal Deficit- Interest Paid on the Borrowings

Revenue deficit is the difference between revenue receipts and revenue expenditure. Revenue deficit occurs when ‘revenue received’ falls short of the ‘estimated revenue’.
When revenue received is greater than the revenue expenditure, it is called the Revenue Surplus.
Revenue deficit is met by borrowing or capital account surplus.


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