Revenue, Fiscal and Primary Deficits
A deficit can be defined as a value by which the total amount falls short of a reference amount. In terms of economics, a deficit is an excess expenditure made by a body apart from the revenue in a reference period.
There are many types of deficit in budgeting depending on the types of expenditure and receipts we consider. The three main concepts of the deficit are as follows:
Revenue deficit is the excess of total revenue expenditure of the government over its total revenue receipts. It is related to only revenue expenditure and revenue receipts of the government. Alternatively, the shortfall of total revenue receipts compared to total revenue expenditure is defined as revenue deficit.
It is an indicator of the fact that the government or the organisation in consideration is not raising enough money to meet its basic needs and the provisions of schemes and services extended by it. Revenue deficit results in borrowing. For example, when government spends more than what it collects by way of revenue, it incurs revenue deficit. Mind, revenue deficit includes only such transactions which affect current income and expenditure of the government.
The fiscal deficit is the excess of total budget expenditure over total budget receipts excluding borrowings during a fiscal year. In simple words, it is the amount of borrowing the government has to resort to meet its expenses.
When a large amount of borrowing is to be done by the government to fulfil its requirements. This is done when the available resources are scarce.
Primary deficit is defined as the fiscal deficit of current year minus interest payments on previous borrowings.
The difference between fiscal deficit and primary deficit is that fiscal deficit indicates the borrowing requirements includes. of the interest amount where as primary deficit excludes interest payment amount. We have seen that borrowing requirement of the government includes not only accumulated debt, but also interest payment on the debt. If we deduct ‘interest payment on debt’ from borrowing, the balance is called primary deficit