The budget deficit is the difference between total expenditure on the one hand and current revenue and net internal and external capital receipts of the government on the other.
Revenue deficit refers to the excess of total revenue expenditure of the government over its total revenue receipts. Revenue deficit signifies that government’s own earning is insufficient to meet normal functioning of government departments and provision of services. Simply put, when the government spends more than what is collects by way of revenue.
Note: the deficit only includes such transactions which affect the current income and expenditure of the government.
The deficit is to be met from capital receipts i.e. through borrowing and the sale of its assets.
The remedial measures for reducing revenue deficit are:
- Government should raise rate of taxes especially on rich people and any new taxes where possible.
- Government should try to reduce its expenditure and avoid unnecessary expenditure.
It gives information on what the government is borrowing for, i.e. for financing its current expenditure or for capital formation. Main implications are:
- Revenue deficit indicates dissavings on government account because the government has to make up for the uncovered gap by drawing upon capital receipts either through borrowing or through sale of its assets.
- Since the borrowed funds from the capital account are used to meet generally consumption expenditure of the government, it leads to inflationary situation in the economy with all its ills. Thus, revenue deficit may result either in increasing government liabilities or in the reduction of government assets.
Note: revenue deficit implies a repayment burden in future without the benefit arising from investment.
- Large borrowings to meet revenue deficit will increase debt burden due to repayment liability and interest payments. Thus may lead to larger and larger revenue deficit in future.