Fiscal Deficit: UPSC Daily Important Topic | 14 December 2021

•Fiscal deficit indicates the borrowing requirements of the government during the budget year. By implication, greater fiscal deficit signifies greater borrowing by the government.

•The extent of fiscal deficit is an indicator of the amount of expenditure for which the government has to borrow money.

•Some economists like J.M. Keynes say that a fiscal deficit situation is beneficial as it assists countries in coming out of recession.

 However, other experts opine that governments should avoid deficits in favour of a balanced budget policy.

•It leads to “debt traps”: Fiscal deficit is financed by borrowing. And borrowing creates the problem of not only (a) payment of interest but also of (b) repayment of loans. As the government borrowing increases, its liability in future to repay loan amount along with interest thereon also increases. Payment of interest raises revenue expenditure leading to higher revenue deficit. Ultimately, the government may be forced to borrow to finance even interest payment leading to the emergence of a vicious circle and debt trap.

•wasteful expenditure: High fiscal deficit generally leads to wasteful and unnecessary expenditure by the government. It can create inflationary pressure in the economy.

•Inflationary pressure: As government borrows from RBI which meets this demand by the printing of more currency notes (called deficit financing), it results in circulation of more money. The circulation of more money causes inflationary pressure in the economy.

•Partial use: The entire amount of fiscal deficit, i.e., borrowing is not available for growth and development of the economy because a part of it is used for interest payment. Only the primary deficit (fiscal deficit minus interest payment) is available for financing expenditure.

•Diminishes future growth: Borrowing is, in fact, a financial burden on future generation to pay the loan and interest amount which slows down the growth of the economy.