Revenue vs Fiscal Deficit
Notes
Revenue deficit = Revenue expenditure - Revenue receipts. It arises when the Government's current (non-asset-creating) spending exceeds its current income. It shows that the Government is dis-saving: it borrows to meet day-to-day spending such as salaries, subsidies, interest and pensions.
Fiscal deficit is the total borrowing requirement, including borrowing for capital expenditure.
Basis | Revenue deficit | Fiscal deficit |
|---|---|---|
Formula | Revenue expenditure - Revenue receipts | Total expenditure - (Revenue receipts + non-debt capital receipts) |
Coverage | Only the revenue account | Revenue and capital accounts |
Indicates | Borrowing to finance consumption | Total borrowing need |
Quality signal | A high value is a worse sign | Depends on how much goes to capital expenditure |
Relationship: Fiscal deficit = Revenue deficit + (Capital expenditure - Non-debt capital receipts). So the share of the revenue deficit in the fiscal deficit shows the quality of the deficit: a higher share means more borrowing for consumption.
Worked example: if revenue expenditure is ₹30 and revenue receipts are ₹22, the revenue deficit is ₹8. If capital expenditure is ₹10 and non-debt capital receipts are ₹1, the fiscal deficit is 8 + 10 - 1 = ₹17, which is the borrowing needed.
Other terms
- Effective revenue deficit = Revenue deficit - grants for the creation of capital assets (introduced in 2011-12 to show the real consumption deficit).
- Golden rule of public finance: borrow only to invest, so the revenue account should balance.
- The FRBM Act originally required a zero revenue deficit; the 2018 amendment dropped the revenue deficit and effective revenue deficit targets and used the fiscal deficit and debt as anchors.
- Capex push: the Government has raised capital expenditure to improve the quality of its spending.
Key Points
- Revenue deficit shows borrowing for current spending.
- Fiscal deficit = revenue deficit + net capital expenditure.
- Effective revenue deficit excludes grants for capital assets.
- The golden rule: borrow only to invest.
- 2018 FRBM amendment removed the revenue deficit target.
MCQs
Q1. Revenue deficit is: (a) Revenue receipts minus revenue expenditure (b) Revenue expenditure minus revenue receipts (c) Total expenditure minus total receipts (d) Capital expenditure minus capital receipts Ans: (b).
Q2. A high share of revenue deficit in the fiscal deficit indicates: (a) Borrowing mostly for capital expenditure (b) Borrowing mostly for consumption (c) A fiscal surplus (d) Low interest burden Ans: (b).
Q3. If the fiscal deficit is ₹40 and interest payments are ₹15, the primary deficit is: (a) ₹25 (b) ₹55 (c) ₹15 (d) ₹40 Ans: (a).