Understanding Deficits: Fiscal, Revenue & Trade

1. Deficits: Fiscal, Revenue & Trade– By Prof. Simply Simple • 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)

2. 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.

3. To reiterate Fiscal Deficit… • The expenses that the Government incurs are, more often than not, more than the income it makes. The difference or deficit between the two is called a Fiscal Deficit. • Thus, the Fiscal Deficit is: Govt.'s total expenses – Govt.’s total receipts (excluding borrowing)

4. 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

5. 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

6. 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 Govt.

7. So what is 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.

8. 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.

9. Confused?!Look at the graph below… FISCALDEFICIT Govt.'s Expenses – Govt.’s Receipts REVENUE DEFICIT Revenue Expenses – Revenue Receipts

10. 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.

11. 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)

12. Hope you have now understood the difference between Fiscal Deficit, Revenue Deficit & Trade Deficit In case of any query, please e-mail lchaturvedi@tataamc.com