Revenue Deficit and Fiscal Deficit

Revenue deficit is the gap between the consumption expenditure (revenue expenditure) of the Government (Union or the State Governments) and its current revenues (revenue receipts). It also indicates the extent to which the government has borrowed to finance the current expenditure. Revenue receipts consist of tax revenues and non-tax revenues. Tax revenues comprise proceeds of taxes and other duties levied. The expenditure incurred for normal running of government functionaries, which otherwise does not result in creation of assets is called revenue expenditure.

Examples of revenue expenditure are Interest Payments and Servicing of Debt, Pensions and (Union government’s) expenditure on Grants-in-Aid and contributions to States and Union Territories (State Governments too incur expenditure towards Grants-in-Aid and contribution to their Local Bodies). Even though some of these grants may be used for creation of assets, all grants given by the Union Government to State Governments/Union Territories and other entities are also treated as revenue expenditure. In the Union Budget (2011-12) a new methodology of capturing the ‘effective revenue deficit’ has been worked out, which takes into account those expenditures (transfers) in the form of grants for creation of capital assets.

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Elimination of the revenue deficit has been a priority for Governments, both the Union and at the State-levels, as a revenue deficit may pre-empt resources which otherwise would be available for capital investments. Implementation ofFiscal Responsibility and Budget Management (FRBM) legislation during the period 2005-10 has helped Governments to reduce their revenue deficits to a considerable extent. The global slowdown in 2008-09 and 2009-10, however, affected the consolidation process. The Thirteenth Finance Commission (FC-XIII) has proposed a target of elimination of revenue deficit for the Union Government by 2013-14 and for State Governments in stages, and in a manner that all States would eliminate these targets latest by 2014-15. The revenue deficit target set by the Thirteenth Finance Commission for the Union Government for the current fiscal year, viz 2011-12, is 2.3% of GDP. As against this, the Medium Term Fiscal Plan of the Union Government has placed this figure at 3.4%.

Fiscal deficit is the difference between revenue receipts plus non-debt capital receipts on the one side and total expenditure including loans, net of repayments, on the other. It measures the gap between the government consumption expenditure including loan repayments and the anticipated income from tax and non-tax revenues. It also indicates the borrowing requirements of the government from all sources. The bigger the gap the more the government will have to borrow or resort to printing money to make both ends meet. Indiscriminate borrowings will push the economy into debt trap, while too much deficit financing may be inflationary. Increasing fiscal deficit over a period of time means government expenditure is rising faster than its revenues. Implementation of Fiscal Responsibility and Budget Management (FRBM) legislation during the period 2005-10 has helped the Union and State governments to reduce their fiscal deficits to a considerable extent. However, the expansionary fiscal stance of these governments during the global slowdown years (2008-09 and 2009-10) resulted in fiscal deficit moving up significantly. The Thirteenth Finance Commission (FC-XIII) has proposed a target of attaining a 3% fiscal deficit (of GDP) for the federal government by 2013-14 and for State Governments in stages, and in a manner that all states would attain 3 % fiscal deficit (of their Gross State Domestic Product) latest by 2014-15. The fiscal deficit target set by the Thirteenth Finance Commission for the Union Government for the current fiscal year, viz 2011-12, is 4.8% of GDP. As against this, the Medium Term Fiscal Plan of the Union Government has placed this figure at 4.6%.

Accounting & Finance for Banking

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