Budget 2025 | Understanding types of deficits and how they are calculated

Budget 2025: Understanding deficits is essential for analysing a nation’s fiscal health and its economic strategies outlined in the Union Budget. A deficit occurs when a government’s expenditures exceed its revenues, signalling an imbalance that requires attention.

There are three primary types of deficits: revenue deficit, fiscal deficit, and primary deficit. Here’s a closer look at each and how they are calculated.

A revenue deficit arises when the government’s revenue expenditure surpasses its revenue receipts in a fiscal year. This occurs when the income generated through regular activities such as taxes and fees is insufficient to cover day-to-day operational expenses. Essentially, it indicates a shortfall in the resources available for regular government operations, highlighting a lack of adequate income. The formula to calculate revenue deficit is:

Revenue Deficit = Revenue Expenditure – Revenue Receipts

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To bridge this gap, the government may resort to borrowing, disinvestment, or introducing measures to increase revenue streams. Possible actions include imposing new taxes, raising existing tax rates, or cutting down non-essential expenditures. Failure to address revenue deficits effectively can result in long-term fiscal challenges.

A fiscal deficit is broader in scope, representing the gap between total government expenditure and its total revenue (excluding borrowings). It reflects the government’s overall borrowing requirement to fund its expenses, which can include investments and developmental projects. The formula to calculate fiscal deficit is:

Fiscal Deficit = Total Expenditure – (Revenue Receipts + Non-Tax Revenue + Disinvestment Proceeds)

A high fiscal deficit can strain the economy by increasing borrowing, which often leads to higher interest rates and reduced credit availability for private investment. Governments can tackle fiscal deficits by curbing subsidies, restructuring taxes, broadening the tax base, or divesting shares in public sector enterprises. Efficient fiscal planning can help redirect funds toward productive investments while reducing reliance on debt.

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The primary deficit, a more focused measure, is the fiscal deficit excluding interest payments on past borrowings. It helps evaluate the borrowing undertaken in the current fiscal year for purposes beyond servicing existing debt. The formula to calculate primary deficit is:

Primary Deficit = Fiscal Deficit – Interest Payments

Reducing the primary deficit is a key step toward fiscal stability. By limiting additional borrowing and ensuring that loans are channelled into productive investments rather than routine expenditures, governments can improve overall debt management and economic health.

In fiscal policymaking, deficits are often expressed as a percentage of the Gross Domestic Product (GDP), allowing for clearer comparisons and insights into the government’s financial position. While deficits are not inherently negative, their management and utilisation play a critical role in determining the country’s economic trajectory.

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