Fiscal deficit part-2

What exactly is the Fiscal Deficit?

The fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowing).If we borrow then those receipts will decrease revenue deficit but not fiscal deficit which is calculated excluding all borrowings of the government

The elements of the fiscal deficit are

 (a) The revenue deficit, which is the difference between the government’s current (or revenue) expenditure and total current receipts (that is, excluding borrowing)

 (b) Capital expenditure

The fiscal deficit can be financed by borrowing from the Reserve Bank of India (which is also called deficit financing or money creation) and market borrowing (from the money market, which is mainly from banks).

The part of the fiscal deficit which is financed by borrowing from the RBI leads to an increase in the money stock.

                               For a given interest rate a larger fiscal deficit by raising the accumulated debt of the government raises the interest burden. However, in the particular case of our economy since liberalization, a large part of the increasing interest burden is because of the rise in the interest rates in the post '91 period. Thus, it is related to the process of liberalization since the rate of interest has to be kept high in a liberalized economy to prevent capital outflow. 

Decomposition of fiscal deficit:

Budget balance is basically influenced by both cyclical(temporary)and structural (permanent) factors ,entailing that change in the fiscal deficit could arise either in response to cyclical changes in output or to structural factors.

Cyclical changes: During recession etc., Transitory effect on FD.

Structural factors: - More durable impact which generated even when the economy is operating at its full employment

• A high fiscal deficit – the excess of government expenditure over receipts – can be problematic for many reasons.
• The fiscal deficit is financed by government borrowing;
•  increased borrowing can crowd out funds available for private investment. 
• High government spending can also lead to a rise in price levels. 

How can we reduce the fiscal deficit?

1.   By increasing tax collection or receipts
a.       Government will not do that rather government want to give tax benefits to rich(why? The same reason –tum bhi khao hum bhi khaye-lobbying at political-corporate level)
b.      Disinvestment in public sector (definitely government will do because it is counterproductive haa haa and great brain is already found at apex level)

2.   By reducing expenditure
a.       Government can reduce expenditure by making its bureaucratic structure more efficient And having no surplus or overstaffing
b.      expenditure on social sectors like education, health and poverty alleviation has been reduced leading to greater hardship for the poor already bearing the brunt of liberalization
c.       all the recommendations of the expenditure reforms commission must be implemented.
3.   Need to institutional reform measures which will encompass all aspects of budgets such as subsidies, taxes ,expenditure and disinvestment.

4.   Government should step up deterrent action against direct tax evaders and eliminate tax incentives to raise revenue collection.

5.   The windfall from sale of spectrum or disinvestment should be deployed for specific purpose like building infrastructure.

Relation between small savings and fiscal deficit:(a)   increase in small savings means increase in borrowings .this increases the burden of revenue deficit and consequently the budgetary deficit ultimately the FD
(b)   Tax concessions are also linked to such savings. Therefore, there is a net fall in tax revenue.
(c)    Increase in small savings means decrease in consumption so decrease in demand lead to decrease in indirect tax collection. 

Primary Deficit: As we know that the Primary deficit is computed by deducting interest payments from fiscal deficit. It thus reflects the borrowings of the government to meet expenditures other than interest payments. 

Primary deficit is one of the parts of fiscal deficit. While fiscal deficit is the difference between total revenue and expenditure, primary deficit can be arrived by deducting interest payment from fiscal deficit. Interest payment is the payment that a government makes on its borrowings to the creditors.