Fiscal Deficit reaches 59 percent

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• The Centre’s fiscal deficit touched 59% of the budget target for 2022-23 in the first eight months, led by sharp growth in capital expenditure, moderate expansion in tax revenues, and higher transfers to states.

What is Fiscal Deficit?

• Fiscal Deficit is the difference between the total income of the government (total taxes and non-debt capital receipts) and its total expenditure. 
• A fiscal deficit situation occurs when the government’s expenditure exceeds its income. This difference is calculated both in absolute terms and also as a percentage of the Gross Domestic Product (GDP) of the country. 
• A recurring high fiscal deficit means that the government has been spending beyond its means.
• Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts)

What constitutes the government’s total income or receipts?

• It has two components revenue receipts and non-tax revenues.
• Revenue receipts of the government
  • Corporation Tax
  • Income Tax
  • Custom Duties
  • Union Excise Duties
  • GST and taxes of Union territories.
• Non-tax revenues
  • Interest Receipts
  • Dividends and Profits
  • External Grants
  • Other non-tax revenues
  • Receipts of union territories
• Expenditures of the government:
  • Revenue Expenditure
  • Capital Expenditure
  • Interest Payments
  • Grants-in-aid for creation of capital assets

Causes Fiscal Deficit

• Sometimes, the governments spend on handouts and other assistance to the weak and vulnerable sections of the society such as the farmers and the poor. 
• A high fiscal deficit can also be good for the economy if the money spent goes into the creation of productive assets like highways, roads, ports and airports that boost economic growth and result in job creation.

How is fiscal deficit balanced out?

• To balance it out in short-term macroeconomics, the government looks at market borrowings by issuing bonds and selling them in through banks. Banks buy these bonds with currency deposits and then sell them to investors. 
• The government also sees a deficit situation as an opportunity to expand policies and schemes, including welfare programmes, without having to raise taxes or cut spending in the Budget.

Source: LM