The concept of deficit expenditure of a government

There are three types of budgets in government budgets. They are known as Balanced Budget, Surplus Budget, and Deficit Budget.

Balanced budget: When the expenditure planned by the government in the budget proposal is assumed to be balanced with the anticipated receipt for a fiscal year. It is called a balanced budget.

Surplus budget: – When expected revenue is more than the estimated expenditure in the proposed budget, it is called surplus budget. Here, the budget becomes surplus when taxes imposed are higher than the expense.

Deficit budget: Deficit expenditure often refers to intentional excess spending meant to stimulate the economy. British economist John Maynard Keynes is the most well-known proponent of deficit spending as a form of economic stimulus.

A budget deficit of a government is the excess of government expenditures over government receipts (income) for a designated financial year. Deficit spending occurs when government spending exceeds its revenue.

Various measures capture government Deficit. These deficits can be classified as Fiscal deficits, Revenue deficits, and Primary deficits.

Fiscal Deficit: An important aspect of the Union Budget is the concept of fiscal deficit. Fiscal Deficit is the difference between the government’s expenditure requirements and its receipts. This equals the money the government needs to borrow during the year.

Fiscal Deficit can be calculated as under.

Fiscal deficit = Total expenditure – Total receipts excluding borrowings.

For instance, if the total expenditure in the budget proposal is ₹ 4 trillion and the total revenue is ₹3.5 trillion, the fiscal deficit would be ₹0.5 trillion.

It shows the total borrowing requirements of the government from all sources amounts to ₹0.5 trillion which is a fiscal deficit.

The part of the fiscal deficit covered by borrowing from the RBI is known as the monetized fiscal deficit. Gross fiscal deficit is a key variable in judging the public sector’s financial health and the stability of the economy.

Revenue deficit: Revenue deficit is calculated by total Revenue expenditure minus total revenue receipts. The effective Revenue Deficit was introduced in the Union Budget of 2011-12. The revenue Deficit includes only such transactions that affect the current income and expenditure of the government.

The effective Revenue Deficit is the difference between revenue deficit and grants for creating capital assets.

Primary Deficit: Fiscal deficit as reduced by interest payments. The interest payment will be the payment that a government makes on borrowings to the creditors.

When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

Primary Deficit: Primary deficit equals fiscal deficit minus interest payments. This indicates the gap between the government’s expenditure requirements and its receipts, not considering the expenditure on interest payments on loans taken in previous years.

Primary deficit = Fiscal deficit – Interest payments

Fiscal Policy of India:

In India, the government makes fiscal policy decisions, with the Ministry of Finance playing a central role in formulating budgets, tax policies, and expenditure plans.

Fiscal policy is using government revenue collection (mainly taxes) and non-tax revenues such as divestment, loans, and expenditure (spending) to influence the economy.

The major objectives of Indian Fiscal policy are economic growth, full employment, and price stability. The government safeguards economic growth, full employment, and price stability in the country through its fiscal policy. The government employs fiscal policy to manage aggregate demand, promote growth, and address socioeconomic challenges.

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