Relationship between revenue deficit and fiscal pdf

Difference Between Revenue Deficit & Fiscal Deficit | BankExamsToday

relationship between revenue deficit and fiscal pdf

through the revenue and expenditure measures of the government budget. First, certain goods This person's consumption stands in a rival relationship to. Govt collects receipts in form of taxes and interests and spends the money in development works. if the expenditure exceeds the receipts then deficit occurs. to . A dissimilarity in the expected revenue and expenditure can result in revenue deficit. The difference between total revenue and total.

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included. Generally fiscal deficit takes place due to either revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.

A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds. What is the difference between fiscal deficit and primary deficit? Primary deficit is one of the parts of fiscal deficit.

While fiscal deficit is the difference between total revenue and expenditure, primary deficit can be arrived by deducting interest payment from fiscal deficit. Interest payment is the payment that a government makes on its borrowings to the creditors. What are the views of different experts on fiscal deficit? Economists differ widely on their views on fiscal deficit. According to John Maynard Keynes, a deficit prevents an economy from falling into recession, while another school of thought is that a country should not have fiscal deficit.

Many economists think that if the deficit is financed by raising debt from the central bank it may lead to an inflationary scenario. In simple words, it is amount of borrowing the government has to resort to meet its expenses.

A large deficit means a large amount of borrowing. Fiscal deficit is a measure of how much the government needs to borrow from the market to meet its expenditure when its resources are inadequate. In the form of an equation: Clearly, fiscal deficit gives borrowing requirements of the government.

Difference between Revenue Deficit and Fiscal Deficit

If we deduct interest payment on debt from borrowing, the balance is called primary deficit. Thus, fiscal deficit gives the borrowing requirement of the government. Can there be fiscal deficit without a Revenue deficit? Yes, it is possible i when revenue budget is balanced but capital budget shows a deficit or ii when revenue budget is in surplus but deficit in capital budget is greater than the surplus of revenue budget.

Fiscal deficit shows the borrowing requirements of the government during the budget year.

3 Types of Budget Deficits and their Measures | Micro Economics

Greater fiscal deficit implies greater borrowing by the government. The extent of fiscal deficit indicates the amount of expenditure for which the government has to borrow money. Fiscal deficit is financed by borrowing.

relationship between revenue deficit and fiscal pdf

And borrowing creates problem of not only a payment of interest but also of b repayment of loans. As the government borrowing increases, its liability in future to repay loan amount along with interest thereon also increases.

Payment of interest increases revenue expenditure leading to higher revenue deficit. Ultimately, government may be compelled to borrow to finance even interest payment leading to emergence of a vicious circle and debt trap. High fiscal deficit generally leads to wasteful and unnecessary expenditure by the government.

relationship between revenue deficit and fiscal pdf

It can create inflationary pressure in the economy. As government borrows from RBI which meets this demand by printing of more currency notes called deficit financingit results in circulation of more money.

This may cause inflationary pressure in the economy. The entire amount of fiscal deficit, i. Only primary deficit fiscal deficit-interest payment is available for financing expenditure. Borrowing is in fact financial burden on future generation to pay loan and interest amount which retards growth of economy. Since fiscal deficit is the excess of govt. Fiscal deficit can be met by borrowing from domestic sources, e.

3 Types of Budget Deficits and their Measures | Micro Economics

It also includes tapping of money deposits in provident fund and small saving schems. Borrowing from public to deal with deficit is considered better than deficit financing because it does not increase the money supply which is regarded as the main cause of rising prices. Another measure to meet fiscal deficit is by borrowing from Reserve Bank of India. Government issues treasury bills which RBI buys in return for cash from the government.

relationship between revenue deficit and fiscal pdf

This cash is created by RBI by printing new currency notes against government securities. Thus, it is an easy way to raise funds but it carries with it adverse effects also. Its implication is that money supply increases in the economy creating inflationary trends and other ills that result from deficit financing. Therefore, deficit financing, if at all it is unavoidable, should be kept within safe limits. Is fiscal deficit advantageous? It depends upon its use.

relationship between revenue deficit and fiscal pdf

Fiscal deficit is advantageous to an economy if it creates new capital assets which increase productive capacity and generate future income stream. On the contrary, it is detrimental for the economy if it is used just to cover revenue deficit.

Measures to reduce fiscal deficit: Primary deficit is defined as fiscal deficit of current year minus interest payments on previous borrowings.