All About Deficits
A deficit is when there is excess of expenditures over revenue for a given time period.
The three deficits related to budget are: Revenue Deficit, Fiscal Deficit and Primary Deficit. Fourth one is Current Account Deficit.
Read about the terms going to to be used in this article from here.
- Revenue deficit is when the total revenue expenditure is greater than the expected revenue.
- So Revenue deficit = Total revenue expenditure – Revenue Receipts.
- So it is only related to the revenue expenditure and not the total expenditure.
- Example: Somebody opens a cloth shop. He expects revenue of Rs 4000 from his total sales, but due to less sales, only Rs 3000 could be made as revenue, then this deficit of Rs 1000 is revenue deficit.
- Fiscal Deficit is when the total expenditure of government is greater than the total revenue generated.
- The borrowings of the government are not added in the revenue, but Fiscal deficit indicates government’s borrowings only.
- So Fiscal deficit = Total expenditure – Total revenue excluding borrowings
- A large deficit will mean a large amount of borrowings. Government borrows from market or central bank to meet its expenditure needs.
- To meet expenditure needs, government can also print money but that will lead to inflation.
- Fiscal Deficit is on Capital Expenditure, and it can happen without a revenue deficit also.
- Primary Deficit is when interest payments are deducted from the fiscal deficit.
- So Primary Deficit is a part of Fiscal Deficit.
- Primary deficit = Fiscal Deficit – Interest payments
- Interest payments mean the payments made on the previous borrowings taken by the government.
- Current Account Deficit is when the total import value of goods/services of a country exceeds the total export value.
- So unlike the above three deficits, it is an international matter.
- CAD = Total imports value – Total exports value
- It is also known as trade deficit.
- CAD is not necessarily harmful for a country because it can also mean investments in the country giving jobs to its people.
- CAD is calculated as a percentage of Gross Domestic Product (GDP).