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Fiscal Deficit UPSC NOTE

 What is fiscal deficit 

  • Fiscal deficit refers to the shortfall in a government’s revenue when compared to its expenditure. 

  • When a government’s expenditure exceeds its revenues, the government will have to borrow money or sell assets to fund the deficit

  • Taxes are the most important source of revenue for any government. 

  • In 2024-25, the government’s tax receipts are expected to be ₹26.02 lakh crore while its total revenue is estimated to be ₹30.8 lakh crore

  • The Union government’s total expenditure, on the other hand, is estimated to be ₹47.66 lakh crore.

  • When a government runs a fiscal surplus, on the other hand, its revenues exceed expenditure

  • It is, however, quite rare for governments to run a surplus

  • Most governments today focus on keeping the fiscal deficit under control rather than on generating a fiscal surplus or on balancing the budget.

How does a government fund its expenditure?

  • In order to fund its fiscal deficit, the government mainly borrows money from the bond market where lenders compete to lend to the government by purchasing bonds issued by the government. 

  • In 2024-25, the Centre is expected to borrow a gross amount of ₹14.13 lakh crore from the market.

  • Which is lower than its borrowing goal for 2023-24, as it expects to fund its spending in 2024-25 through higher GST collections

  • Economists were expecting that the Centre would set a borrowing target of about ₹15.6 lakh crore for 2024-25.

  • It should be remembered that central banks such as the Reserve Bank of India (RBI) are also major players in the credit market, although they may not always directly purchase government bonds.

  • The RBI may still purchase government bonds in the secondary market, from private lenders who have already purchased bonds from the government. 

  • When a government borrows from the bond market, it not only borrows from private lenders but also indirectly from the central bank

  • The RBI purchases these bonds through what are called ‘open market operations’ by creating fresh money, which in turn can lead to higher money supply and also higher prices in the wider economy over time.

  • Government bonds are generally considered to be risk-free as the government.

  • So governments generally do not find it hard to borrow money from the market

  • The bigger problem is the rate at which they are able to borrow the money. 

  • As a government’s finances worsen, demand for the government’s bonds begins to drop forcing the government to offer to pay a higher interest

rate to lenders, and leading to higher borrowing costs for the government.

  • Monetary policy also plays a crucial role in how much it costs governments to borrow money from the market. 

  • Central bank lending rates which were near zero in many countries before the pandemic have risen sharply in the aftermath of the pandemic.

  • This makes it more expensive for governments to borrow money and could be one reason why the Centre is keen to bring down its fiscal deficit.

What is the difference between fiscal deficit and national debt?

  • The fiscal deficit should not be confused with the national debt

  • The national debt is the total amount of money that the government of a country owes its lenders at a particular point in time. 

  • The national debt is usually the amount of debt that a government has accumulated over many years of running fiscal deficits and borrowing to bridge the deficits. 

  • The fiscal deficit is generally expressed as a percentage of a country’s GDP since it is believed that the figure shows how easily the government will be able to pay its lenders

  • In other words, the higher a government’s fiscal deficit as a share of GDP, the less likely its lenders will be paid back without trouble. 

  • Countries with larger economies can run higher fiscal deficits (in terms of absolute numbers of money).

How much is the Centre expected to borrow from the market?

  • The Centre plans to bring down its fiscal deficit in 2024-25 to 5.1% of GDP.

  • This is  despite having plans to boost capital expenditure and to spend on other programmes. 

  • So, most of the revenue to fund such spending will have to come from tax collections

  • The Centre expects tax collections to rise by 11.5% in 2024-25

  • It has also projected a cut in expenditure on fertilizer subsidy, from ₹1.88 lakh crore in 2023-24 to ₹1.64 lakh crore in 2024-25

  • The amount spent on food subsidy is also projected to drop from ₹2.12 lakh crore in 2023-24, to ₹2.05 lakh crore in 2024-25

  • Trying to balance the budget primarily through raising tax rates to increase tax collections,

  • However, could come at the cost of economic growth since taxes can act as a dampener on economic activity

  • There is no guarantee, however, that the government will be able to meet its fiscal deficit target, which is seen as ambitious by many, as its projections may turn out to be wrong.

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