Budget Deficit & Its Types

Budget Deficit: 

There can be different types of deficit in a budget depending upon the types of receipts and expenditure we consider. Accordingly, there are three concepts of deficit, namely (i) Revenue deficit, (ii) Fiscal deficit and (iii) Primary deficit.

Measure of Budgetary Deficit: 

Budgetary deficit is the excess of total expenditure (both revenue and capital) over total receipts (both revenue and capital).

Following are three types (measures) of deficit:

1. Revenue deficit = Total revenue expenditure – Total revenue receipts.
2. Fiscal deficit = Total expenditure – Total receipts excluding borrowings.
3. Primary deficit = Fiscal deficit-Interest payments.
1. Revenue Deficit: Revenue deficit is excess of total revenue expenditure of the government over its total revenue receipts. It is related to only revenue expenditure and revenue receipts of the government. Alternatively, the shortfall of total revenue receipts compared to total revenue expenditure is defined as a revenue deficit.
Revenue deficit signifies that government’s own earning is insufficient to meet normal functioning of government departments and provision of services. Revenue deficit results in borrowing. Simply put, when the government spends more than what it collects through revenue, it incurs a revenue deficit. Mind, revenue deficit includes only such transactions which affect the current income and expenditure of the government. Put in symbols:

Revenue deficit = Total Revenue expenditure – Total Revenue receipts.

For instance, revenue deficit in government budget estimates for the year 2012-13 is Rs 3,50,424 crore (= Revenue expenditure Rs 12,86,109 crore – Revenue receipts Rs. 9,35,685 crore) vide summary of the budget in Section 9.18. It reflects the government’s failure to meet its revenue expenditure fully from its revenue receipts.

The deficit must be met from capital receipts, i.e., through borrowing and sale of its assets. Therefore, given the same level of fiscal deficit, a higher revenue deficit is worse than a lower one because it implies a higher repayment burden in future not matched by benefits via investment.
2. Fiscal Deficit: Fiscal deficit is defined as an excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year. In simple words, it is the amount of borrowing the government has to resort to meet its expenses. Therefore, a large deficit means a large amount of borrowing. 

A fiscal deficit measures how much the government needs to borrow from the market to meet its expenditure when its resources are inadequate. In the form of an equation:

Fiscal deficit = Total expenditure – Total receipts excluding borrowings = Borrowing

If we add borrowing in total receipts, the fiscal deficit is zero. Clearly, fiscal deficit gives borrowing requirements of the government. Let it be noted that the safe limit of fiscal deficit is 5% of GDR. Again, borrowing includes accumulated debt, i.e. amount of loan, and interest on debt, i.e., interest on a loan. If we deduct interest payment on debt from borrowing, the balance is called a primary deficit.

Fiscal deficit = Total Expenditure – Revenue receipts – Capital receipts excluding borrowing

A little reflection will show that fiscal deficit is, in fact, equal to borrowings. Thus, fiscal deficit gives the borrowing requirement of the government.
Can there be a fiscal deficit without a Revenue deficit? Yes, it is possible (i) when the revenue budget is balanced, but the capital budget shows a deficit or (ii) when the revenue budget is in surplus, but a deficit in the capital budget is greater than the surplus of the revenue budget.
Importance: Fiscal deficit shows the borrowing requirements of the government during the budget year. A greater fiscal deficit implies greater borrowing by the government. The extent of fiscal deficit indicates the amount of expenditure for which the government has to borrow money. For example, fiscal deficit in government budget estimates for 2012-13 is Rs 5, 13,590 crore (= 14, 90,925 – (9, 35,685 + 11,650 + 30,000) vide summary of budget in Section 9.18. It means about 18% of expenditure is to be met by borrowing.
3. Primary Deficit: Primary deficit is defined as the fiscal deficit of the current year minus interest payments on previous borrowings. It is the amount by which a government's total expenditure exceeds its total revenue, excluding interest payments on its debt. In other words, whereas fiscal deficit indicates borrowing requirement inclusive of interest payment, primary deficit indicates borrowing requirement exclusive of interest payment (i.e., amount of loan).
We have seen that the government's borrowing requirement includes accumulated debt and interest payment on a debt. If we deduct ‘interest payment on debt’ from borrowing, the balance is a primary deficit.
It shows how much government borrowing is going to meet expenses other than interest payments. Thus, zero primary deficits mean that government has to resort to borrowing only to make interest payments. To know the amount of borrowing on account of current expenditure over revenue, we need to calculate the primary deficit. Thus, the primary deficit is equal to the fiscal deficit less interest payments. Symbolically:

Primary deficit = Fiscal deficit – Interest payments.

For instance, primary deficit in Government budget estimates for the year 2012-13 amounted to Rs 1,93,831 crore (= Fiscal deficit 5,13,590 – interest payment 3,19,759) vide budget summary in section 9.18.
Thus, the primary deficit is a narrower concept and a part of the fiscal deficit because the latter also includes interest payments. It is generally used as a basic measure of fiscal irresponsibility. The difference between fiscal and primary deficits reflects the amount of interest payments on public debt incurred in the past. Thus, a lower or zero primary deficit means that while interest commitments on earlier loans have forced the government to borrow, it has realized the need to tighten its belt.

Gross Fiscal Deficit:

The difference between total revenue and total expenditure of the government is called a fiscal deficit. It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included.
Description: The gross fiscal deficit (GFD) is the excess of total expenditure, including loans net of recovery over revenue receipts (including external grants) and non-debt capital receipts. The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.
Generally, a fiscal deficit occurs either due to a revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.
A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

Fiscal Policy: 

Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, including demand for goods and services, employment, inflation and economic growth.