What is a Budget Deficit?
Commonly, all of us prepare a budget for a destined time period, or for any event. When our expenses exceed the budgeted amount, we say that we face a budget deficit. Similarly, in Economics the term ‘budget deficit’ is coined from this basic principle of expenses exceeding the revenues. This is a macroeconomic study, hence the budget deficit concerns the economy as a whole and not any specific business.
Here, we will go through the details of this topic, where we will answer important questions like ‘What budget deficit?’, the formula of the same, the types of the budget deficit, etc.
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In scenarios where the budget deficit occurs, we see that the current expenses had exceeded the total amount of income that is being received through the procedure of the standard operating system. A nation that wishes to correct its own budget deficit might require to lower down or cut back certain expenditures and increase their revenue-generating activities, or they might also operate a strategy where they will employ a combination of these two.
Types of the Budget Deficit
The following are the types of budget deficit and the factor which causes the deficit is also indicated side to it.
The Types:
Revenue Deficit: Revenue expenditure when gets reduced by revenue receipts.
Fiscal Deficit: Total expenditure when gets reduced by the total receipts except for the borrowing part.
Primary Deficit: The fiscal deficit when get reduced by the payment of interest.
Effective Revenue Deficit: The revenue deficit when it gets reduced by the non-payment of grants which is required for the creation of the capital assets.
Monetized Fiscal Deficit: This part of the fiscal deficit is being later covered up by borrowing from the RBI.
Budget Deficit Formula
How do we know if the country is facing any budget deficit? The economist of a country needs the estimation of this indicator to indicate and further analyze if the country is facing any situation of the budget deficit. Thus, in order to find the estimation, they calculate using the formula of Budget Deficit.
Hence, the budget deficit formula is –
Revenue deficit = Total revenue expenditure – Total revenue receipts. ... Fiscal deficit = Total expenditure – Total receipts excluding borrowings.
Government Budget Deficit
Government debt is defined as the stock that is outstanding and is issued by the government at any time in the past period which is not yet repaid from where it was previously utilized from.
A Government budget deficit happens when a government spends more in a given year than what it collects in the form of revenues, such as taxes. For example, if a government takes in 10 Cr in revenue in a particular year, and its expenditures for the same year are 12 Cr, then the government is running a deficit of 2 Cr.
The Government issues its own debt whenever public borrowing is done. Thus, the amount of this outstanding debt will be equal to the amount of the net borrowing which is being borrowed by the government from the public. While, this deficit is another extra addition in the current period (which can be a year, quarter, month, etc.) to the outstanding debt amount of the government. The deficit will be a negative figure when the value of the outstanding debt lowers down, which says the negative deficit is actually the surplus.
Budget Deficit Example
Meera is the founder of a small start-up business that makes artistic handcrafts. In order to widen her own business, she decided to purchase a factory and other necessities. Furthermore, she was also required to hire and also pay the employees, and also take care of their benefits. In the first year, Meera’s company had a budget surplus of Rs. 100,000.
But, in the next year, the economy went through a period of recession thus her business that year lacked growth and she could only sell her handicrafts worth Rs. 300,000. Her cost, on the other hand, escalated to Rs. 700,000. Now, her company ran into a budget deficit of Rs. 400,000 (Rs. 700,000 – Rs. 400,000)
Fiscal Deficit and Budget Deficit
First let us know, what is a fiscal deficit?
Fiscal Deficit can be defined as the excess of the total expenditures which is expensed out over the total receipts which are received in a time period, this is calculated excluding the borrowings part in a single year. Calculating the Fiscal deficit gives an estimation of the amount which is to be borrowed by the government to meet all the expenses. The higher the amount the Fiscal Deficit, the higher will be the borrowed amount.
The formula which is required for calculating the fiscal deficit is as follows:
> Fiscal deficit = Total expenditures – Total receipts excluding borrowings
Thus, the Budgetary deficit is the only difference between all the receipts and all the expenses in both terms, that is revenue and capital account of the government. While a fiscal deficit occurs when the government's total expenditures exceed the revenue which is being generated, this excludes the money that is from the borrowings.
Advantages of Budget Deficit
If there is an increase in the fiscal deficit, it can actually boost a sluggish type economy by providing more money to the people, thereby they can now buy and invest even more. However, deficits for a longer time will be detrimental to the overall economic growth.
In times of recession, the economy tends to lower its cost and focus more on revenue-generating activities. Budget Deficit can actually be a realization to the government, he will take actions to combat the situation.
Did You Know?
The highest country with a maximum budget deficit is the United States with -480,225. Next, the second-highest country with the maximum budget deficit is the UK with -121,921.
The opposite of the budget deficit is known as a budget surplus. In a budget surplus, revenue the current expenses exceed the funds which are to be allocated as desired.
Thus, we see that the budget deficit is an advantage to the country to some extent, while the deficit is to be curbed accurately. From this study, we know about the types and the formula of Budget Deficit. From the examination point of view, the chapter is vital for the students to study.
FAQs on Understanding Budget Deficit
1. What is a budget deficit in the context of the CBSE Class 12 Economics syllabus?
A budget deficit occurs when a government's total expenditure for a financial year exceeds its total receipts (excluding borrowings). It signifies that the government has spent more money than it has earned through taxes and other non-debt creating sources. This is a fundamental concept in the 'Government Budget and the Economy' unit for the 2025-26 session.
2. How is the government's budget deficit calculated using a simple formula?
The budget deficit is calculated with the following formula: Budget Deficit = Total Government Expenditure – Total Government Receipts. Here, Total Expenditure includes both revenue and capital spending, while Total Receipts include both revenue and capital receipts that do not create debt. A positive result indicates a deficit, whereas a negative result would indicate a budget surplus.
3. What is the difference between a revenue deficit, fiscal deficit, and primary deficit?
These three terms measure different aspects of the government's financial health:
- Revenue Deficit: This arises when total revenue expenditure is greater than total revenue receipts. It shows that the government's own earnings are insufficient to cover its day-to-day operational expenses.
- Fiscal Deficit: This is the excess of total expenditure over total receipts, excluding borrowings. It represents the total amount of borrowing required by the government to fund its spending for the year.
- Primary Deficit: This is calculated by subtracting interest payments on previous loans from the current year's fiscal deficit. It highlights the borrowing needed to finance spending, excluding the interest payment burden from past debts.
4. What are the main implications of a high fiscal deficit for an economy?
A high fiscal deficit can have several significant economic consequences:
- Debt Trap: The government has to borrow money to pay for the deficit, which increases its debt. Paying interest on this debt can lead to more borrowing in the future, creating a vicious cycle known as a debt trap.
- Inflation: To finance the deficit, the government may borrow from the central bank, which might print new currency. This increases the money supply and can lead to inflation.
- Reduced Future Growth: Heavy borrowing by the government can crowd out private investment and a large portion of future revenue may be used for debt repayment, limiting funds for development projects.
- Dependence on Foreign Sources: If the government borrows from other countries or international institutions, it can increase its dependence on them.
5. How does a government typically finance its fiscal deficit?
A government uses several methods to finance its fiscal deficit. The primary ways include:
- Borrowings: The government can borrow funds by issuing bonds and securities to the public, commercial banks, and other financial institutions within the country. It can also borrow from external sources like foreign governments and international bodies (e.g., World Bank, IMF).
- Deficit Financing: This involves borrowing from the country's central bank (like the RBI in India). The central bank may print new currency to lend to the government, which is a method used cautiously due to its high inflationary potential.
6. Why is the fiscal deficit often expressed as a percentage of the country's GDP?
Expressing the fiscal deficit as a percentage of the Gross Domestic Product (GDP) provides a standardized measure to assess its magnitude. It shows the size of the deficit in relation to the overall size of the economy. This is crucial because a deficit of ₹5 lakh crore would be very significant for a small economy but less so for a very large one. This percentage allows for meaningful comparisons of the deficit over different years for the same country and across different countries.
7. How does a budget deficit contrast with a budget surplus and a balanced budget?
These three terms describe the possible outcomes of a government's annual budget:
- Budget Deficit: Occurs when Total Expenditure > Total Receipts. The government spends more than it earns.
- Balanced Budget: Occurs when Total Expenditure = Total Receipts. Government spending is exactly equal to its earnings.
- Budget Surplus: Occurs when Total Receipts > Total Expenditure. The government earns more than it spends, leaving it with excess funds.
