Differentiate between revenue deficit, fiscal deficit and primary deficit? How does deficit financing impact the economy

The government may spend an amount equal to the revenue it collects. This is known as a balanced budget. However, the most common feature is the situation when expenditure exceeds revenue. This is when the government runs a budget deficit. There are various measures that capture government deficit as explained below.

Differentiation between revenue deficit, fiscal deficit and primary deficit

  • The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts.
  • Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.
  • Primary deficit is nothing but fiscal deficit less interest payments.

They can also be represented as

  • Revenue deficit = Revenue expenditure – Revenue receipts
  • Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts).
  • Primary deficit = fiscal deficit less interest payments.

Impact of deficit financing on the economy

Ricardian equivalence after one of the greatest nineteenth century economists, David Ricardo, first argued that in the face of high deficits, people save more. It is called ‘equivalence’ because it argues that taxation and borrowing are equivalent means of financing expenditure. When the government increases spending by borrowing today, which will be repaid by taxes in the future, it will have the same impact on the economy as an increase in government expenditure that is financed by a tax increase today. One of the main criticisms of deficits is that they are inflationary.

If government deficits succeed in their goal of raising production, there will be more income and, therefore, more saving. In this case, both government and industry can borrow more.

If the government invests in infrastructure, future generations maybe better off, provided the return on such investments is greater than the rate of interest.

Synopsis

KeywordsDeficit Financing
PaperAPPSC Group I 2020 Mains Paper IV: Economy and Development
Question4 (b). Differentiate between revenue deficit, fiscal deficit and primary deficit? How does deficit financing impact the economy?
SourceNCERT Class XII – Macroeconomics

Analysis

The first part of the question is basic definitions. Second part is analytical. Here both views (Positives and Negatives) should be presented with forward-looking conclusion.

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