prof simply simple fiscal revenue & trade deficits

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Deficits: Fiscal, Revenue & Trade

 – By Prof.Simply Simple

• Prof. Simply Simple had earlier takenyou through the concept of FiscalDeficit. (For ref: kindly refer the TMFWebsite)

• This week, we will look at RevenueDeficit (which is a subset of the FiscalDeficit) and Trade Deficit (which is afunction of our import-export trading)

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What is a Deficit?

• Simply put, a budget deficit occurs when an

entity (often a government) spends more

money than it takes in.

• The opposite of a budget deficit, on the other 

hand, is a budget surplus.

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To reiterate Fiscal Deficit…

• The expenses that the Government incurs are,

more often than not, more than the income it

makes. The difference or deficit between the

two is called a Fiscal Deficit.

• Thus, the Fiscal Deficit is:

Govt.'s total expenses – Govt.’s total receipts (excluding borrowing)

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What are Govt. Expenses?

• The Government needs money for its hugeexpenses.

• We can broadly divide Govt. expenses into twotypes:

 – Revenue Expenses, which it incurs inrunning its day-to-day business like paying

salary to its staff 

 – Capital Expenses, which include allexpenses incurred by the Govt. for creating

assets like money spent on constructing ahospital

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What are Govt. Revenues?

• We can broadly divide the sources of 

Government revenues or earnings into

two categories:

 – Tax Sources, which include all thedirect and indirect taxes, and are

recurring in nature

 – and Non-tax Sources, which includeRevenue Receipts and capital

receipts, and are a kind of one-time

income

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Before we move on…

• To understand the concept of Revenue Deficit, we need to

quickly understand the following two terms from the

previous two slides:

 – Revenue Expenses: Revenue expenditure is the expense

incurred for the normal running of the Govt.’s various

departments and services, interest charged on debt

incurred by Govt., subsidies, etc.

 – Revenue Receipts: Revenue receipts consist of tax

collected by the government and other receipts consisting

of interest and dividend on investments made by Govt.,

fees and other receipts for services rendered by Govt.

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So what is Revenue Deficit?

• Revenue deficit is the difference between the

revenue expenditure and the revenue receipts

(the recurring income for the Government).

• Thus, the Revenue Deficit is:

Revenue Expenditure – Revenue Receipts

• It shows the shortfall of government’s currentreceipts over current expenditure.

• When a country runs a revenue deficit, it means

that the Govt. is unable to meet its runningexpenses from its recurring income.

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So…

• Revenue deficit indicates the shortfall

between revenue incomes and

revenue disbursements, which is to be

filled by capital account surplus, or borrowings.

• Thus, a revenue deficit implies that the

government is unable even to cover itsexpenditure on maintaining itself 

through the tax and non-tax revenues

that it mobilizes, and has to resort to

borrowings.

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Confused?!

Look at the graph below…

Govt. Expenses

Revenue Expenses

Capital Expenses

Govt. Receipts

Tax Sources

Non-tax Sources

Revenue Receipts Capital Receipts

FISCALDEFICIT

Govt.'s Expenses – Govt.’s Receipts

REVENUE DEFICIT

Revenue Expenses – Revenue Receipts

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Before we tackle Trade Deficit..

• We need to understand what is known as Balance of 

Trade

• Balance of Trade is a measure of a country's

exports minus its imports.

• A positive balance of trade is known as a trade

surplus and consists of exporting more than is

imported; a negative balance of trade is known as a

trade deficit or, informally, a trade gap.

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Therefore…

• Simply put, Trade Deficit is a negative balance of 

trade, i.e. when a country’s imports exceed its exports.

• Thus, the Trade Deficit is:

Export – Import

(where imports are greater than exports)

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Hope you have now understood the difference between

Fiscal Deficit, Revenue Deficit & Trade Deficit

In case of any query, please e-mail

lchaturvedi@tataamc.com