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Definition: The Budget Deficit is the financial situation wherein the expenditures exceed the revenues. The Budget Deficit generally relates to the government’s expenditure and not the business or individual’s spending.
The government’s collective deficits are termed as “National Debt”. In the case of a budget deficit, be it the Government or any business, it has to resort to the external borrowings in order to escape the bankruptcy. The Investors or analyst study the budget deficit of the country or business to judge its financial health.
There can be different types of budget deficits that can be classified on the basis of types of receipts and expenditures taken into the consideration. These are:
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 government’s revenue deficit has several severe implications, which are as follows:
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.
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:
Borrowings are the only way to finance the fiscal deficit, and this results into the following severe implications on the economy::
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.
Definition: The Primary Deficit is the difference between the fiscal deficit of current year and the interest paid on the previous borrowings. Thus, primary deficits are government’s borrowings exclusive of interest payment.
Generally, the loan raised by the government is inclusive of the interest amount, and if that amount is deducted from the principal loan amount, the balance amount is called as the primary deficit. The purpose of measuring such deficit is to know the amount of borrowings that government can utilize in the expenses other than the interest payments.
Symbolically, it can be represented as:
Primary Deficit = Fiscal Deficit – Interest payments on the previous borrowings
In case, the primary deficit is zero; then the fiscal deficit becomes equal to the interest payment, which means government resort to borrowings just to pay off the interest payments. Thus, the low or zero primary deficits indicate that the government was forced to resort to the external borrowings to meet out its previous interest obligations, and nothing gets added to the existing loan.
Definition: The Monetised Deficit is the extent to which the RBI helps the central government in its borrowing programme. In other words, monetised deficit means the increase in the net RBI credit to the central government, such that the monetary needs of the government could be met easily.
The monetized deficit results in the increase in the net holdings of treasury bills by the RBI and also the RBI contribution towards the government’s market borrowings increases. With the issue of more money to the government, the money supply in the economy increases, as a result of which the inflationary pressure prevails. Hence, we can say that monetised deficits are the part of a fiscal deficit that leads to the inflation in the economy.
Thus, it can be concluded that monetised deficit occurs when the government takes a monetary support from the RBI to finance its debt obligations and try to reduce its unnecessary expenditures.
The Budget surplus is opposite of budget deficit where the revenues exceed the expenditures, and when the spending is equal to the revenues, the budget is said to be balanced. The major implications of a Government budget deficit are:
Ideally, for any investor the budget deficits are a threat, but he must understand the reasons behind such a deficit. The reason for such a deficit could be the investments made in the infrastructure development or any other profitable investments that will yield profits in the future, could be seen as healthier than the situation, where a country or a business entity is facing a deficit due to unsustainable expenses.
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