Budget deficits

The essentials

A balanced budget has estimated receipts equal to estimated expenditure. A surplus budget has receipts greater than expenditure, and a deficit budget has expenditure greater than receipts. Most governments, including India's, usually run deficit budgets. Three measures of deficit are used.

Key points

• Revenue deficit = Revenue expenditure − Revenue receipts. It shows that the government is dissaving: borrowing to meet day-to-day expenses.
• Fiscal deficit = Total expenditure − (Revenue receipts + Non-debt capital receipts). It equals the total borrowing requirement of the government.
• Primary deficit = Fiscal deficit − Interest payments. It shows borrowing needed for current needs excluding interest on past debt.
• A high fiscal deficit raises the public debt and future interest burden, and may push up interest rates and crowd out private investment, or lead to inflation if financed by printing money.
• A high revenue deficit is considered worse than a capital-related deficit, because borrowed money is used for consumption rather than for assets that yield future returns.
• A deficit is not always bad: borrowing to build infrastructure can raise future output.

Exam tips

Remember the order: total expenditure minus revenue receipts minus non-debt capital receipts gives fiscal deficit; subtract interest to get primary deficit. If primary deficit is zero, the government borrows only to pay interest.

Common mistakes

• Subtracting all capital receipts (including borrowings) when computing fiscal deficit; that would make it zero.
• Subtracting interest from revenue deficit instead of fiscal deficit.