Union Budget 2020: What Is Fiscal Deficit?

Union budget 2020 is knocking at the door. While the government is all set to unveil the country’s financial blueprint on February 1, commoners await with bated breath latest developments.   

Needless to say, it will touch upon various aspects of the economy, right from personal income tax to railways to consumer goods. 

However, how many of us are well versed with the nuances of the country’s economy, of course including Union Budget? How many people are acquainted with budget glossary? Well, definitely very few! 

While several ideas and concepts keep doing the rounds, one of the most popular words (or a phrase) that we come across during budget is fiscal deficit. Fiscal deficit is an integral part of every macroeconomic and financial discourse. 

Let us understand the concept of fiscal deficit in detail

What is Fiscal Deficit?

Fiscal deficit is defined as the difference between the government’s total revenue and total expenditure. It generally takes place either due to revenue deficit or a major hike in capital expenditure. 

However, one question that repeatedly appears is, when does fiscal deficit take place? 

Fiscal deficit takes place only when there is a revenue deficit or there is a substantial increment in government spending. Unfortunately, masses tend to perceive the concept in a negative light. 

Renowned economist John Maynard Keynesian was also of this view that fiscal deficit is definitely not a bad thing. 

But how? 

Putting it in a simple manner, if the government is spending more on the creation of productive assets that can lead to employment generation and give an impetus to economic growth, then it is fine.

How Does The Cycle Work?

Usually, governments spend more than the tax they earn, that is how fiscal deficit takes place. But this is not something to bother about, especially in the case, when the economy is sputtering. This is due to the fact that public spending has the potential to revive economy substantially.

Observe this situation, when the government spends money on creating productive assets like building roads or a bridge or even metro railways, and other infrastructure projects, many distressed engineering and construction companies get back on track. Not only they will end up purchasing commodities such as cement, steel, machines, but also hire a talent pool to complete the project within a stipulated time frame. Needless to say, it will create more job opportunities. 

The newly employed talent pool will then spend their salaries on food, clothing, shelter (rent) as well as consumer and electronic goods like soaps, detergent, toothpaste or a washing machine, refrigerator. This will, directly and indirectly, fill the coffers of the state through taxes.

Another way around is that the government can spend money by directly subsidising things for poor people and for those who don’t earn.

If the economically backward populace gets cheap food, they will have room to spend what little they earn on other things. That again, generates demand for small-ticket items like low-priced soaps and food grains. So, in nutshell, spending extra in one year can lead to yielding higher revenues for the government in the coming years.

However, the caveat regarding fiscal deficit is that, it is good till the time the government is spending on capital expenditure and the deficit remains within reasonable limit. This way, it will generate assets and will provide the required fillip to a slowing economy.  

What Was Government’s Estimate?

Finance Minister Nirmala Sitharaman had set a fiscal deficit target of 3.3 per cent for FY20. However, amidst ongoing slowdown and shortfall in tax collection, the government is likely to miss this target.

What Is The Ideal Benchmark For Fiscal Deficit?

The FRBM Act of 2003 had set a target of three per cent fiscal deficit to be achieved by 2008-09 and zero revenue deficit by that year. So, the FRBM Act’s fiscal deficit target of three per cent of GDP is considered an ideal estimate. 

However, till now no government has succeeded is achieving this target so far.