What is Budget Deficit? Meaning, Causes & Impact

A budget deficit occurs when a government’s total spending is higher than its total income during a specific period, usually a financial year. It serves as a key barometer for a country’s financial health since it clearly shows how much money the government borrows to meet its spending requirements. Understanding the budget deficit meaning is significant for the economy and policymakers, as it not only influences inflation but also affects interest rates, public debt, and the long-term development of the economy. This article explains what is budget deficit in economics, what causes a budget deficit, its types, and more.

Types of Budget Deficit 

After understanding the budget deficit definition, here are the three main types of budget deficit in India:  

• Fiscal Deficit: Fiscal deficit refers to the total gap between the government’s overall expenditure and its total revenue, excluding borrowings. It basically shows the total borrowing requirement of the government. 
• Revenue Deficit: Revenue deficit refers to the shortfall that arises when the government’s revenue expenditure exceeds its revenue receipts. It shows whether routine expenses are being met through regular income. 
• Primary Deficit: The fiscal deficit excluding interest payments on past borrowings. It reflects the current year’s borrowing needs without the burden of previous debt. 

What Causes a Budget Deficit? 

The following are the reasons that cause budget deficits. 

• High Government Spending: With high government spendings like increased expenditure on infrastructure, defense, subsidies, and administration, can exceed available revenue. 
• Low Tax Revenue: Reduced tax collections due to tax cuts, exemptions, or weak compliance lower government income. 
• Economic Slowdown: When there is a slower economic growth, it reduces the gains from the business and personal incomes, leading to lower tax receipts. 
• Welfare Schemes: Large social welfare and subsidy programs increase expenditure, especially when not matched by higher revenue. 

After understanding the causes of a budget deficit, the article further define budget deficit formula.  

Budget Deficit Formula 

The budget deficit formula is: 

Budget Deficit = Total Government Expenditure − Total Government Revenue 

• Here, if the government spending is higher than its revenue, then it results in a budget deficit. 
• If the deficit is higher, it means the government needs to borrow more to finance its expenses. 
• The formula helps compare fiscal discipline across different years. 

Example: If total government expenditure is ₹50 lakh crore and total revenue is ₹40 lakh crore, the budget deficit is ₹10 lakh crore. 

Key Factors Contributing to Budget Deficits 

The following are the key factors that contributes to the budget deficit: 

• Subsidies and Transfers: The large amount spent on food, fuel and fertiliser subsidies means there is increased spending without increased direct revenue. 
• Interest Payments: The large amount of interest paid every year for the previous borrowing creates additional annual fixed expenditure.  
• Structural Factors: Structural factors, such as a small tax base or continuing welfare obligations, keep the deficit at a high level 
• Cyclical Elements: When times are economically depressed (bad economy) tax revenues decrease, while the amount spent on support programs increases. 
• Global Events/Crises: Global recession, pandemic, or massive increases to commodity costs. These events create either a substantial increase in expenditures or a sharp decrease in revenues. 

How Can a Government Reduce a Budget Deficit? 

The following are some ways through which the government may reduce a budget deficit.  

1. Increasing Revenue: The government of India has many ways to help reduce its budget deficit; these ways include improving tax compliance, broadening the tax base, and increasing non-tax revenue. Improvement in any of these areas will also increase revenue for the Indian government. 
2. Reducing Expenditure: The government can reduce non-essential expenditure, and rationalisation of subsidies can reduce expenditure.  
3. Fiscal Reforms: Structural changes in tax and spending policies are an effective long-term strategy for creating better fiscal discipline. 
4. Disinvestment: Selling interest in state-owned companies and monetising government facilities can provide additional income without incurring additional debt. 

After understanding what is budget deficit, the article further explains the advantages & disadvantages of a budget deficit.  

Advantages & Disadvantages of Budget Deficits 

The table below highlights the advantages & disadvantages of a budget deficit.  

Budget Deficit vs Government Debt 

The table below shows the differences between budget deficits and government deficits.  

Conclusion 

The budget deficit occurs when government spending surpasses government revenue during a given financial year, implying that the government has to borrow. It is motivated by factors like high spending by the public, low taxes, slowing economies and long-term structural commitments. Although the budget deficit can promote growth and welfare in hard times, repeated deficits add to the level of debt in the population and strain the inflation and interest rates.  

As a result, effective management of deficits is critical for the stability of an economy, maintaining fiscal discipline, and developing sustainably. The ability for investors to follow trends in the marketplace with a reputable stock trading app gives them insight into how and when market activity occurs and what opportunities will arise from policies made by governmental bodies.