Deficits: Fiscal, Revenue &Trade

Prof. Simply Simple had earlier taken you through the concept of Fiscal Deficit. (For

ref: kindly refer the TMF Website)

This week, we will look at Revenue Deficit (which is a subset of the Fiscal Deficit)

and Trade Deficit (which is a function of our import-export trading)

What is a Deficit?

Simply put, a budget deficit occurs when an entity (often a government) spends more

money than it takes in.

The opposite of a budget deficit, on the other hand, is a budget surplus.

To reiterate Fiscal Deficit…

The expenses that the Government incurs are, more often than not, The expenses that the Government incurs are, more often than not,

more than the income it makes. The difference or deficit between the more than the income it makes. The difference or deficit between the

two is called a Fiscal Deficit.two is called a Fiscal Deficit.

Thus, the Fiscal Deficit is:Thus, the Fiscal Deficit is:

Govt.'s total expenses – Govt.’s total receipts (excluding borrowing)Govt.'s total expenses – Govt.’s total receipts (excluding borrowing)

What are Govt. Expenses?

The Government needs money for its huge expenses.

We can broadly divide Govt. expenses into two types:

Revenue Expenses, which it incurs in running its day-to-day business like paying

salary to its staff

Capital Expenses, which include all expenses incurred by the Govt. for creating

assets like money spent on constructing a hospital

What are Govt. Revenues?

We can broadly divide the sources of Government revenues or earnings into two

categories:

• Tax Sources, which include all the direct and indirect taxes, and are recurring in

nature

• and Non-tax Sources, which include Revenue Receipts and capital receipts,

and are a kind of one-time income

Before we move on…Before we move on…

To understand the concept of Revenue Deficit, we need to quickly understand the

following two terms from the previous two slides:

• Revenue Expenses: Revenue expenditure is the expense incurred for the normal

running of the Govt.’s various departments and services, interest charged on debt

incurred by Govt., subsidies, etc.

• Revenue Receipts: Revenue receipts consist of tax collected by the government

and other receipts consisting of interest and dividend on investments made by

Govt., fees and other receipts for services rendered by Government.

So what So what isisRevenue Deficit?Revenue Deficit?

Revenue deficit is the difference between the revenue expenditure and the revenue receipts (the recurring income for the Government).

Thus, the Revenue Deficit is: Revenue Expenditure – Revenue Receipts

It shows the shortfall of government’s current receipts over current expenditure.

When a country runs a revenue deficit, it means that the Govt. is unable to meet its running expenses from its recurring income.

So…

Revenue deficit indicates the shortfall between revenue incomes and revenue

disbursements, which is to be filled by capital account surplus, or borrowings.

Thus, a revenue deficit implies that the government is unable even to cover its

expenditure on maintaining itself through the tax and non-tax revenues that it

mobilizes, and has to resort to borrowings.

Confused !!!Look at the graph below…

Govt. Expenses

Revenue Expenses

Capital Expenses

Govt. Receipts

Tax Sources

Non-tax Sources

Revenue Receipts Capital Receipts

FISCALDEFICIT

Govt.'s Expenses – Govt.’s Receipts

REVENUE DEFICIT

Revenue Expenses – Revenue Receipts

Before we tackle Trade Deficit..Before we tackle Trade Deficit..

We need to understand what is known as Balance of Trade

Balance of Trade is a measure of a country's exports minus its imports.

A positive balance of trade is known as a trade surplus and consists of exporting more

than is imported; a negative balance of trade is known as a trade deficit or, informally,

a trade gap.

Therefore…

Simply put, Trade Deficit is a negative balance of trade, i.e. when a country’s imports

exceed its exports.

• Thus, the Trade Deficit is:

Export – Import

(where imports are greater than exports)