BUDGETARY DEFICIT EXPLAINED [2021]

MEASURES OF BUDGETARY DEFICIT

REVENUE DEFICIT:

It refers to an excess of government revenue over its revenue receipts during the fiscal year.

Symbolically,

REVENUE DEFICIT= REVENUE RECEIPT- REVENUE EXPENDITURE   

IMPLICATIONS OF REVENUE DEFICIT

• It indicates a lack of savings on the account of the government. In other words, the government is using up the savings of another sector of the economy to finance its consumption expenditure.
• It indicates the inability of the government to meet is regular and recurring expenditures.
• It also indicates that government has to cover this through capital receipts that are borrowings and disinvestment.
• Excessive use of capital receipts leads to an inflationary situation in an economy.

FISCAL DEFICIT

It refers to an excess of total expenditure over total receipts of government excluding borrowings. It shows a more comprehensive view of budgetary imbalances. Fiscal deficit measures total borrowing requirements by the government. Therefore, fiscal deficit = borrowings

Symbolically,

ISCAL DEFICIT= TOTAL EXPENDITURE- TOTAL RECEIPTS (EXCLUDING BORROWINGS i.e., NON-DEBT CREATING CAPITAL RECEIPTS)

• Non-debt creating capital receipts refers to those capital receipts which doesn’t create any liabilities for the government. It only includes those receipts which are generated by sales of assets.
• Example disinvestment, recovery of loan, etc.
• Debt creating capital receipts refers to those capital receipts creating government liability.
• Example borrowings, National Savings Certificate (NSC), etc.

IMPLICATIONS OF FISCAL DEFICIT

• DEBT TRAP: It is a vicious circle where the government takes more loans to repay the earlier loan. Borrowings not only involve repayment of the principal amount but also required payment of interest which increases the fiscal deficit and revenue deficit.
• INFLATION: To curb the situation of fiscal deficit government mainly rely on borrowings from RBI. RBI prints new currency to meet deficit requirements. Deficit financing increases the money supply in the economy and creates inflationary pressure.
• FOREIGN DEPENDENCY: The government also borrows from the rest of the world and it increases our dependency on other countries. It is sometimes associated with economic and political interference.
• HAMPERS FUTURE GROWTH: Borrowings increase the financial burden on future generation it adversely impact future growth and development of the country.

PRIMARY DEFICIT:

It refers to the difference between the fiscal deficit of the current year and the interest payment of the previous year.

Symbolically,

PRIMARY DEFICIT= FISCAL DEFICIT – INTEREST PAYMENT

IMPLICATIONS OF PRIMARY DEFICIT

It indicates how much of the government borrowings are going to meet expenses other than the interest payment. So low or zero primary deficit indicates that interest payment on earlier loans forced the government to borrow.

In case of zero primary deficit

PD= FD- Interest payments

0= FD- Interest payments

FD= Interest payments

Hence, Borrowings = Interest payments

It indicates that with borrowings government manages to pay only interest on previous borrowings.

QUESTIONS – BUDGETARY DEFICIT

1. Is a deficit budget indicates the inefficiency of government? (3marks)
2. How good is disinvestment as a measure to tackle the revenue deficit in India? (3-4 marks)
3. Discuss the issue of deficit reduction (6 marks)
4. Does public debt impose a burden? (4 marks)
5. Give the relationship between revenue deficit and fiscal deficit(4 marks )
6. Explain why public goods must be provided by the government. (3 marks)
7. “Government across the nations are too much worried about the fiscal deficit “. Do you think that fiscal deficit is necessarily inflationary? Support your answer with valid reason. (6marks)
8. Why are subsidies treated as revenue receipts? (1 mark)
9.  Why is a tax not a capital receipt? ( 1 mark)
10. Mention the indirect tax subsumed under GST.(1mark)
11. Borrowings from the general public leads to an increase in revenue deficit. True or false. Give reason. (1 MARKS)
12. The budget is in surplus when last year’s receipt of the government greater than last year’s expenditure of the government. True or false. Give reason. (1 marks)
13. The government is only presented by the central government in India. True or false. Give reason. ( 1 mark)
14. Which of the following affects national income? (1 mark)
    1. goods and service tax
    2. corporation tax
    3. subsidies
    4. none of these
15. Government expenditure on mid-day meal scheme running in government schools is a type of ______expenditure in the government budget. (1 mark)
16. Distinguish between primary deficit and fiscal deficit. (3 marks )
17. Distinguish between revenue deficit and fiscal deficit ( 3 marks)
18. Revenue deficit is met only through borrowings by the government. True and false. Give reason. (1 marks)
19. Borrowings in the government budget is:
    1. Revenue deficit
    2. Fiscal deficit
    3. Primary deficit
    4. Deficit in taxes
20. Revenue deficit includes capital receipts and capital expenditure. True and false. Give reason. (1 mark)
21. The fiscal deficit is equal to:( 1 mark )
    1. Primary deficit minus interest payments
    2. Primary deficit plus interest payments.
    3. Total budget expenditure minus total budget receipts.
    4. None of the above.
22. _____ is a tax whose impact and incidence fall on the same person. (1 mark)
23. Which of the following is a combination of direct taxes? (1 mark)
    1. Excise duty and wealth tax
    2. Service tax and income tax
    3. Excise duty and service tax
    4. Wealth tax and income tax
24. Which of the following are sources of capital receipt? (1 mark)
    1. Foreign donations
    2. Dividends
    3. Disinvestment
    4. Indirect tax
25. Fiscal deficit is the difference between primary deficit and interest payment. True or false. ( 1 mark)
26. Which of the following statement is true? (1 mark)
    1. Loans from IMF are a revenue receipt.
    2. A higher revenue deficit necessarily leads to a higher fiscal deficit.
    3. Borrowings by a government represent a situation of fiscal deficit.
    4. Revenue deficit is the excess of capital receipts over the revenue receipts.
27. The fiscal deficit is measured in terms of disinvestment. True or false(1 marks)
28. Primary deficit equals:(1 mark)
    1. Borrowings
    2. Interest payment
    3. Borrowings less interest payment
    4. Borrowings and interest payment both

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