Do I need to explain “what does DEFICIT stand for”? Well deficit arise when your expenditures are higher than your earnings. Now if you relate the same formula to the activities of Govt then it will be easy for you to know what a Fiscal Deficit all about.
Fiscal deficit is essentially the difference between what the government spends and what it earns, that means the total expenditures exceed the revenue that it generates from various sources. This is a simple terms shows how much of the expenses are actually generated by the revenue that the government is able to raise through different sources like taxes and even non tax efforts. Government’s income includes the taxes, duties, sales of shares in the public sector companies, auction of public resources like spectrum, coal blocks, etc. The expenses include salaries for public sector employees, pension for retired employees, national security, subsidy for fuel and fertilizers, etc. These are only the sample where the actual list is really huge.
A sharp rise in expenditure or a slowdown in tax or duties collections or even both these events can lead to a rise in the fiscal deficit for the country. The fiscal deficit also expressed as a percentage of GDP or Gross Domestic Product. Such deficits actually give the signal to the government about the total borrowing requirements.
Does this Fiscal Deficit different from Revenue Deficit?
In simple word, a mismatch in the expected revenue and expenditure can result in Revenue Deficit. Revenue deficit arises when the government’s actual net receipts is lower than the projected receipts. On the contrary, if the actual receipts are higher than expected one, it is termed as revenue surplus.
A revenue deficit does not mean actual loss of revenue. Let’s take an example to understand it better; suppose a company had projected expenses of Rs. 1,00,000 and projected revenues of Rs. 1,50,000. If its actual expense increases to Rs. 1,25,000 and its actual revenue remain same as expected i.e Rs. 1,50,000, then it will have a revenue deficit of Rs. 25,000. In other words, its net revenue would be Rs. 25,000 less than projected.
Now if you relate this to the countries revenue and expenditures i.e. country expects a revenue receipt of Rs 1,50,000 and expenditure worth Rs 1.00,000, it can result in net revenue of Rs. 50,000. But the actual revenue becomes Rs 1,50,000 where expenditure increased to Rs. 1,25,000. This translates into net revenue of Rs 25,000, which is Rs 25,000 lesser than the budgeted net revenue and this called as Revenue Deficit. Where a fiscal deficit talks about the negative figures of earning/revenue as expenditures become higher than earnings.