What is the Revenue Deficit?
A revenue deficit transpires when obtained net income is smaller than the predicted net income. This occurs when the actual amount of revenue and/or expenditures do not match with budgeted revenue and expenditures. This is the opposite of a revenue surplus, which transpires when the actual net income surpasses the projected amount.
In this article, we are going to talk about Revenue Deficit and everything you would ever need to know about it. This can be quite an interesting topic to learn about, especially if you're attracted to learning about financial concepts. This is also a fundamental concept that would be studied during your 11th and 12th economics classes. We will learn the definition of deficit in revenue, the formula and how to solve any question you've been given, the disadvantages of deficit. You will see a solved example, examples of deficits, and learn many other concepts. You will also learn about the fiscal deficit, revenue deficit, the difference, and much more. Vedantu helps you to answer fundamental questions such as “what is revenue deficit?” effectively.
Understanding Revenue Deficit
A revenue deficit, not to be mixed with a fiscal deficit, measures the distinction between the predicted income and the original amount of income. If a company or government has a revenue deficit, its income isn't sufficient to cover its basic services. When that occurs, it may make up for the revenue it needs to cover by acquiring money or selling existing assets.
To remedy a revenue deficit, a government can elect to raise taxes or cut costs. Similarly, a business with a revenue deficit can develop by cutting variable costs, such as supplies and labour. Fixed costs are more tricky to adjust because most are built by contracts, such as a building contract.
Difference Between Fiscal Deficit and Revenue Deficit
Businesses and the government use this concept. In simple terms, a deficit arises when the real net income is less than the projected or anticipated net income. There are many disadvantages of revenue deficit which we will be learning more about throughout the essay. The opposite of this, actual net income being more than anticipated net income, is called a revenue surplus. The revenue deficit is often confused with the fiscal deficit, but it shouldn't be. These are both very different concepts. It is the difference between the anticipated amount of income and the actual amount of income. In simple terms, if this occurs, it means that a certain business or even the government is not able to cover its expenses with the income that it has. When this happens, businesses usually opt to borrow or sell assets to get some money to pay for their basic expenses. The major difference between fiscal deficit and revenue deficit is that fiscal deficit is the extra amount of the total government expenditure over receipts during a fiscal year in the current account as well as the capital account. These receipts are from tax as well as non-tax sources; however, it doesn't include the borrowings. It indicates insufficient funds to finance the functioning of a business or government. The revenue deficit is the difference between the expected government expenditures and receipts during a fiscal year in a revenue account. This indicates an increase in future liabilities on the interest payment and loan payments of the government. Many students get confused between these two, which is why it is very important to know the difference between fiscal deficit and revenue deficit.
This deficit can be avoided or reduced by recognising and applying measures that would reduce or cut the costs. This way, the revenue would be greater than the expenditure hence giving a surplus instead of a deficit.
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How to Calculate the Deficit, and What is the Formula?
The deficit or surplus is calculated by deducting the revenue expenditure from the total revenue receipts. In simple terms, the revenue deficit formula is:
Revenue Deficit = Total Revenue Receipts – Total Revenue Expenditure
Revenue Receipts
Revenue receipts can be interpreted as those receipts that neither form any liability nor cause any decline in the government's assets. These receipts are regular and recurring, in nature.
Revenue Expenditure
Short-term expenses of the current period or the ones used within one year are termed revenue expenditures. These expenses typically include expenses incurred to meet the open-ended operational costs of running a business.
What are the Disadvantages of Revenue Deficit?
By reading about examples of revenue deficit, you can realise how it has a negative impact and what the disadvantages are. Some of the disadvantages are:
It can negatively affect the credit rating of a business or government because it means that the business/government is not able to meet its current and future costs meaning that they would have to borrow or disinvest to cover up.
If a business has a deficit, it may become difficult for banks to provide them with loans or investors to invest because it shows that the receipts are less and the expenditure is more. This implies that returns would be less; hence it is not a good investment. The deficit also makes the business look less attractive to potential investors, existing investors, potential employees, etc.
In this post, we have studied what revenue deficit, the causes, the disadvantages, how to calculate it, and more. Now let's look at a solved example of revenue deficit to give you more understanding and some frequently asked questions that would solve any other doubt that you might have.
Conclusion
A deficit doesn’t mean a loss.
Revenue deficit implies that basic operations can be covered with the revenue one has
An effective revenue deficit formula is total revenue receipts – total revenue expenditure.
You can reduce the deficit by cutting costs.
The major difference between fiscal deficit revenue deficit
To learn more about examples of revenue deficits be sure to collaborate with Vedantu.
FAQs on Revenue Deficit: Meaning and Causes
1. What is a revenue deficit in the context of the government budget as per the CBSE Class 12 syllabus?
A revenue deficit occurs when a government's total revenue expenditure is greater than its total revenue receipts. In simple terms, it means the government's income from regular sources (like taxes and non-tax revenue) is not enough to cover its day-to-day operational expenses, such as salaries, pensions, and interest payments.
2. What are the primary causes of a revenue deficit for a government?
The main causes of a revenue deficit for a government typically include:
- High Subsidies: Significant government spending on subsidies for items like fuel, food, and fertiliser.
- Interest Payments: Large payouts on interest for government debt accumulated over the years.
- Defence and Administrative Costs: High levels of non-developmental expenditure on defence, law and order, and general administration.
- Inefficient Tax System: Low tax collections due to tax evasion, a narrow tax base, or an economic slowdown reducing overall income.
3. How is the revenue deficit calculated? Please provide the formula.
The revenue deficit is calculated by simply subtracting the government's total revenue receipts from its total revenue expenditure. The formula is:
Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts.
A positive result from this calculation indicates a deficit, showing a shortfall in the government's current account.
4. Can you provide a simple example to explain a revenue deficit?
Imagine the government projects its total revenue receipts for the year 2025-26 to be ₹20 lakh crore (from taxes, duties, etc.). However, its estimated revenue expenditure (for salaries, subsidies, interest payments) for the same year is ₹23 lakh crore. Using the formula, the revenue deficit would be:
₹23 lakh crore (Expenditure) - ₹20 lakh crore (Receipts) = ₹3 lakh crore (Revenue Deficit). This ₹3 lakh crore shortfall must be met through borrowing.
5. What are the main implications of a persistent revenue deficit on an economy?
A persistent revenue deficit has several serious implications for an economy. It indicates that the government is dissaving, which means it is using up savings from other sectors to fund its consumption needs. This leads to:
- Increased Debt Burden: The government must borrow to cover the deficit, increasing its overall debt and future interest payment liabilities.
- Inflationary Pressure: If the government borrows from the Reserve Bank of India (deficit financing), it increases the money supply, which can lead to inflation.
- Reduced Capital Spending: The government may have to cut down on productive capital expenditure, like building infrastructure, which hinders long-term economic growth.
6. How does a revenue deficit fundamentally differ from a fiscal deficit?
The key difference is in what they measure. A revenue deficit specifically looks at the shortfall in the government's current income versus its current expenses. In contrast, a fiscal deficit is a much broader measure that shows the government's total borrowing requirement. It is the difference between the government's total expenditure (both revenue and capital) and its total receipts (excluding borrowings). Essentially, a revenue deficit is a part of the fiscal deficit that signifies borrowing for consumption purposes.
7. Why is a revenue deficit considered a major concern for the financial health of a country?
A revenue deficit is a major concern because it shows that the government is borrowing money not to create productive assets (like roads or power plants) but to finance its daily operational expenses. This is financially unsustainable as it creates a future liability (debt) without creating any corresponding asset to generate future income. It erodes the government's net worth and can lead to a vicious cycle of debt, where more borrowing is needed just to pay the interest on past loans.
