Is zero revenue deficit desirable?

Is zero revenue deficit desirable?

Subject : Economy

Section: Fiscal Policy

Key Points:

• Reducing revenue deficit to near zero to manage fiscal deficit especially in a crisis situation is accepted as fiscal wisdom.
• A single minded pursuit of this target, accompanied by a mindless transition to capital expenditure can hurt the poor and affects human capital formation and the economic growth process.
• Zero revenue deficit is desirable only if it is attempted through tax revenue buoyancy than revenue expenditure compression.
•  If the zero revenue deficit is attained through compression in revenue spending related job guarantee schemes, cuts in education and health spending, and social security measures, it can trigger a humanitarian crisis amidst widening inequalities in the post pandemic period.
• In the classification of budgetary transactions, revenue expenditure is further re-categorised into general services, economic services and social services.
•  A step further is to say general services (mainly interest payments, salary and pensions, establishment expenses) are non-developmental spending. Social services (mainly social infrastructure spending including education, health, water and sanitation) and economic services are broadly classified as developmental spending.
•  IMF has tried to move away from “single concept of deficit” to “purpose specific deficits”. It has developed the concept ideal deficit which measures the real macroeconomic gap is Public Sector Borrowing Requirement (PSBR) and not the fiscal deficit or revenue deficit.
• PSBR measures the resource gap of “general government” (all tiers of government) plus public sector deficits.

The time series data on “general government” across countries are provided by the IMF Government Finance Statistics (GFS) database.