REVENUE DEFICIT

REVENUE DEFICIT

Subject : Economics

Context : The States are headed for a fourfold expansion in their revenue deficit this fiscal over the last year due to far lesser tax collections, Crisil Ratings said in a report.

Concept :

Revenue Deficit

• Revenue deficit is excess of total revenue expenditure of the government over its total revenue receipts.
• It is related to only revenue expenditure and revenue receipts of the government.
• Alternatively, the shortfall of total revenue receipts compared to total revenue expenditure is defined as revenue deficit.
• Revenue deficit actually indicates that the government’s own earning is inadequate to meet normal functioning of government departments and provision of services. Revenue deficit results in borrowing.
• When the government spends more than what it collects by way of revenue, it incurs revenue deficit.
• The revenue deficit includes only such transactions which affect the current income and expenditure of the government.
• Revenue deficit = Total Revenue expenditure – Total Revenue receipts

Implications

• The deficit has to be met from capital receipts, i.e., through borrowing and sale of its assets. Given the same level of fiscal deficit, a higher revenue deficit is worse than lower one because it implies a higher repayment burden in future not matched by benefits via investment.

Effective Revenue Deficit

• Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets.
• The concept of effective revenue deficit has been suggested by the Rengarajan Committee on Public Expenditure.
• It is aimed to deduct the money used out of borrowing to finance capital expenditure. The concept has been introduced to ascertain the actual deficit in the revenue account after adjusting for expenditure of capital nature.