What is Fiscal Deficit?

You would have heard the term 'fiscal deficit' over the news repeatedly now that the date for the budget announcement is drawing closer.

As a reader and as a citizen, we do find ourselves wanting to understand what it means especially in a democracy like India. The decisions taken by our finance minister does affect our daily lives. It's best not to choose to be ignorant about it.

Following is an explanation of common doubts around fiscal deficit for basic understanding.

What is a fiscal deficit?

'Deficit' is the opposite of 'Surplus,' meaning a shortage of something. A fiscal deficit is when the revenue generated by the government is less than its total expenditure. The revenue is generated mainly from taxes and government-run businesses. Money borrowed by the government is not considered here.

What are the usual causes of fiscal deficit?

The obvious one is that the revenue is less than expected. It can also occur when there has been a major capital expenditure made by the government to create a long-term asset like infrastructure.

How is it dealt with?
When there is a deficit, the country can borrow from its central bank (RBI in India) or raise money through capital markets by an issue of treasury bonds and bills.

What is deficit spending?
A government's excess spending over its revenue is deficit spending.

Economic theories around fiscal deficit

Some economists have suggested that a fiscal deficit can have a positive effect especially if the deficit spending was done to moderate or end a recession.

In case of high unemployment rates, an increase in government spending will create a market for business, which will in-turn create income and an increase in consumer spending which will increase business output. The increase in business output raises GDP (Gross Domestic Product).

As the market size increases, it will lead to growth in the economy. How the government uses the deficit or surplus to influence the economy is called 'fiscal policy.'