Balanced Budget Vs. Deficit or Surplus Budget

On the basis of the magnitude of receipts and expenditures budget can be classified as:

1. Balanced budget

2. Deficit budget

3. Surplus budget

1. Balanced Budget:

When government receipts are equal to the government expenditure it is called balanced budget.

Balanced budget — Receipt = Expenditures

Merits:

1. The government doesn’t indulge in wasteful expenditure

2. It ensures financial stability

3. A balanced budget is expected to increase aggregate demand slightly. Accordingly balanced budget is a good policy to increase aggregate demand when the country is not at full employment but very near to it.

Demerits:

Balanced budget is not an achievement of the government as it has following limitations:

1. It doesn’t offer solution to the problem of unemployment during depression

2. It doesn’t match with the growth and development of less developed or underdeveloped countries as these countries need more government expenditure in the form of investment.

Impact on Economic Activities :

Balanced budget may be neutral in the sense that it leads to neither expansion nor contraction in the level of economic activities. However, a change in the size of the balanced budget will lead to a change in national income.

2. Deficit Budget:

When government expenditure exceeds government receipts, the budget is said to be deficit budget.

Deficit Budget — Receipt < Expenditure

Impact upon the Level of Economic Activity:

A deficit budget means that the injections into the circular flow of income are more than the leakages. The effect of this will be to increase aggregate demand in the economy. As a result, the level of income and employment will increase. Therefore a deficit budget is good policy to tackle the problem of recession arising due to deficient demand.

3. Surplus Budget:

When government receipts are more than government expenditures we call it a surplus budget.

Surplus Budget — Receipts > Expenditures

Impact on Economic Activity :

A surplus budget implies that leakage from the circular flow of income are more than the injections. This leads to contraction in the level of economic activity. Consequently, the surplus budget reduces aggregate demand in the economy. Therefore, the surplus budget is advisable to control inflation arising from excess demand in the economy.

Types of Budget Deficit: Revenue, Fiscal and Primary Deficit – Meaning & Implications :

When the estimated receipts of the government fall short of proposed expenditures, the budget is said to be in deficit.

There can be different types of deficit in a budget depending on the types of receipts and expenditures taken into consideration.

The main measures of budgetary deficit in India are:

1. Revenue deficit

2. Fiscal deficit

3. Primary deficit

1. Revenue Deficit:

Revenue deficit denotes the difference between revenue receipts and revenue expenditures.

“Revenue deficit refers to the excess of revenue expenditures of the government over its revenue receipts in a financial year.”

It mainly focuses on the revenue aspects of the government like revenue expenditure and revenue receipts.

Revenue deficits happen due to the insufficiency of the government’s funds to meet the expenditure.

Revenue Deficit = Revenue Expenditure – Revenue Receipts

Implications of Revenue Deficit:

1. Revenue deficit indicates the government’s current financial status. Revenue deficit means dis – saving on government account. It shows that government is spending more than its current income. It implies that government should either cut short its expenditures or should increase its revenue income to meet the consumption demands.

2. A revenue deficit indicates the insufficiency of the government’s funds to meet regular and recurring expenditure within the proposed budget.

3. It indicates that the government is unable to save and is using the savings of the other sectors. This implies that resources have to be borrowed from other sectors of the economy to cover the excess expenditure of the government. This reduces the resources available for private investment. This has adverse effect on economic growth.

4. Higher borrowings put pressure on revenue expenditure in the form of interest payments. This further adds to the problem of deficit. This may impose undue burden on the future generations as they have to bear the pinch of the interest burden.

5. As capital receipts are being used to fulfil consumption requirements, the inflation rate starts to increase borrowing. A high level of revenue deficit causes inflationary pressure in the economy.

Measures to Reduce Revenue Deficit:

1. Government should take steps to control the revenue deficit by cutting down the government expenditures. This can be done by avoiding the unnecessary or unproductive expenses that are being incurred.

2. The second thing that should be done is to increase the revenue receipt. This can be done through tax or non tax methods.

2. Fiscal Deficit:

“The fiscal deficit refers to the excess of the total expenditure over total receipts or income, excluding borrowing in a fiscal year.”

Fiscal deficit mainly focuses on the borrowings of the government. It is mainly used to explain and understand the budgetary development in India.

Fiscal Deficit = Total budgetary Expenditure – Revenue Receipts – Capital Receipts (Excluding borrowing)

Fiscal Deficit = (Revenue Expenditure – Revenue Receipt) + (Capital Expenditure – Capital Receipts excluding borrowings)

Fiscal Deficit = Revenue deficit + (Capital Expenditure – Capital Receipts excluding borrowing)

Implications of Fiscal Deficit:

1. Fiscal deficit is the key indicator of budgetary deficit in India, it is a comprehensive measure of fiscal imbalance in the economy. It measures the total resource gap of the government. It shows the total borrowing requirements of the government from all sources – market loans from financial institutions, public borrowings under various small saving schemes, borrowings from RBI and and external borrowing.

2. To meet financial needs, the government borrows money from RBI. For this the RBI issues new currency, which increases the supply of money in the economy, ultimately increasing the rate of inflation.

3. Government has to borrow to meet this deficit. Due to continuous borrowing, the future liability of the government in the form of payment of interest and repayment of loans also increases. This may increase the revenue deficit. This may lead to more borrowings and interest payments. This further results in the formation of a vicious cycle of debt for the country, resulting in a “debt trap”.

3. Foreign dependency increases as a result of an increase in the foreign borrowings of the government.

4. It harms the development and growth of the country due to the increase in the number of borrowings, creating a burden on the upcoming generations.

Sources of Financing Fiscal Deficit:

1. To reduce the fiscal deficit the government can start borrowing from domestic or internal and external sources like the market, small savings funds, state provident funds, external sector and short term funds.

2. The government could use the method of deficit financing; printing of new currency notes. This can cover payments on debts by issuing securities through the issue of new currencies by RBI.

3. Primary Deficit:

Finance Ministry has introduced one more concept of deficit Known as ” primary deficit”.

“Primary deficit is the difference between fiscal deficit and interest payments by the government on its borrowing”.

Or it can be said that difference between the fiscal deficit of the current year and the interest paid on the borrowings of the previous years is known as primary deficit.

Primary deficit indicates the borrowing requirements of the government for the purpose, excluding the interest payments.

Primary Deficit = Fiscal Deficit – interest Payment.

Implications of Primary Deficit:

1. The primary deficit indicates the number of expenses, other than the interest payments, that are going to be met by government borrowings.

2. A low or zero primary deficit indicates that interest payments on previous loans has forced the government to borrow or get more loans.

Question : Give difference between :

1. Revenue Deficit and Fiscal Deficit

2. Primary Deficit and Fiscal Deficit

Answer :

1 Revenue Deficit and Fiscal Deficit:

S.N.	Revenue Deficit	Fiscal Deficit
1.	It refers to the revenue expenditure of the govt. over its revenue receipts.	It is the excess of total expenditure of the govt. over its revenue and capital receipts excluding borrowings.
2.	It implies that govt. is using up savings of other sectors of the economy to finance its consumption expenditures.	A country facing a fiscal deficit as to face a situation of the debt trap.
3.	It shows wasteful expenditures of the govt. on administration.	It further reduces future growth and development of the country and economy.
4.	It reduces the assets of the govt. due to disinvestment.	It increases foreign dependency.
5.	A high revenue deficit shows fiscal indiscipline.	It leads to inflationary pressure.
6.	A high revenue deficit gives a warning signal to the govt. to either reduce /decrease its expenditure or increase its revenue.	It increases the liabilities of the govt.

2. Primary Deficit and Fiscal Deficit:

Basis	Primary Deficit	Fiscal Deficit
Meaning	It is the difference between the fiscal deficit of the current year and the interest paid on the borrowings of the previous year.	It is the excess of total expenditure over total receipts or income, excluding borrowings in a fiscal year.
Indicator	Primary Deficit indicates the govt.’s total borrowing requirements except interest.	Fiscal Deficit indicates the govt.’s total borrowing requirements including interest.
Formula	Primary Deficit = Fiscal Deficit – interest Payments	Fiscal Deficit = Total Expenditure – Total receipt (except borrowings)

Balanced, Deficit & Surplus Budget and Types of Budget Deficit

Balanced Budget Vs. Deficit or Surplus Budget

Types of Budget Deficit: Revenue, Fiscal and Primary Deficit – Meaning & Implications :

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