A fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings. Deficit differs from debt, which is an accumulation of yearly deficits.
Fiscal deficit = Total expenditure – Total revenue (excluding borrowings)
Cause of Fiscal Deficit
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.
Fiscal Deficit – Good or Bad
A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy.
How can the Fiscal Deficit be reduced ?
The obvious way to reduce a budget deficit is to cut government spending. However this kind of fiscal tightening can cause lower economic growth, which in turn can cause a higher deficit as the government gets less tax revenue in a recession.