How Does the Borrowings To Finance Fiscal Deficit Impact the Economy?
In this aticle, we will discuss what is fiscal deficit, calculation of fiscal deficit etc. Also we will see financing of fiscal deficit. How the borrowings to finance the fiscal deficit of a country would have severe implications on the economy.
What is Fiscal Deficit?
- Fiscal Deficit refers to the financial situation wherein the government’s total budget exceeds the total receipts excluding borrowings made during the fiscal year.
- Thus, a difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings the government need. While calculating the total revenue, borrowings are not included.
- The Gross Fiscal Deficit (GFD) is the excess of total expenditure including loans net of recovery over revenue receipts (including external grants) and non-debt capital receipts. The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.
- Generally fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.
Calculation of Fiscal Deficit
- Fiscal Deficit = Total Expenditure – Total Receipts Excluding Borrowings
- Fiscal deficit = Total Expenditure – Revenue receipts – Capital receipts excluding borrowing
- Through Fiscal deficit, the government can determine the amount that needs to be borrowed in case it lacks adequate resources.
- The fiscal deficit can occur even if the revenue deficit is not there if the following conditions prevail:
- Revenue budget is balanced, but the capital budget is in deficit.
- Revenue budget is in the surplus, and the capital budget is in deficit, and the deficit is more than the surplus.
Financing of Fiscal Deficit
- A deficit is usually financed through borrowing from either the central bank of the country. It can also be done by raising money from capital markets by issuing different instruments like treasury bills and bonds.
- Thus, Borrowings are the predominant way to finance the fiscal deficit.
severe implications Of Borrowings on the economy
1.Increase in Debt Obligations : The fiscal deficit could be financed through borrowings. With more and more borrowings the debt obligations increases. The government has to repay the loan amount along with the interest that results into the increase in the revenue expenditure. As a result, the revenue deficit increases. Thus, this compels the government to resort to the external borrowings.
2.Inflationary Pressure in the Economy : The deficit often leads to the wasteful expenditure of the government that ultimately results in the inflationary pressures in the economy. Also, the government issues money from the RBI, that prints more currency, called as deficit financing and with more circulation of money in the economy the inflation persists.
3.Partly Utilization of Loans : The money borrowed in the form of loan is not fully utilized since the government has to pay a part of it in the form of interest. Thus, the loan remains partly utilized.
4.Slow Down of Economic Growth : With the borrowings and repayment of liability, the growth of the economy slows down in the future.
Thus, the fiscal deficit is the amount of borrowings that government resorts to meet out its requirement. The larger the deficit, the larger is the amount of borrowings and vice-versa.