What is Revenue Deficit?

Revenue Deficit definition: 

  • Revenue deficit arises when the government’s revenue expenditure exceeds the total revenue receipts.
  • Revenue deficit includes those transactions that have a direct impact on a government’s current income and expenditure.
  • This represents that the government’s own earnings are not sufficient to meet the day-to-day operations of its departments. Revenue deficit turns into borrowings when the government spends more than what it earns and has to resort to the external borrowings.

Revenue Deficit Formula: How is it calculated?

Here’s how the revenue deficit is calculated:

Revenue Deficit: Total revenue receipts – Total revenue expenditure.

  • Revenue Deficit deals only with the government’s revenue receipts and revenue expenditures.
  • Note that revenue receipts are receipts which neither create liability nor lead to a reduction in assets.

It is further divided into two heads:

  • Receipt from Tax (Direct Tax,  Indirect Tax)
  • Receipts from Non-Tax Revenue

Revenue Expenditure is referred to as the expenditure that does not result in the creation of assets reduction of liabilities. It is further divided into two types

  • Plan revenue expenditure
  • Non-plan revenue expenditure

How is Revenue deficit met?

To overcome such a financial situation, the government can take these measures:

  • Through the borrowings or sale of existing assets, the deficit could be met from the capital receipts.
  • The government can increase its non-tax or tax receipts.
  • The government could try to reduce unnecessary expenditures.

What does Revenue Deficit indicate?

  • Revenue Deficit is shown as a reference indicator in the Medium-term Fiscal Policy Statement (MTFP). The Revenue Deficit of the government has several implications, such as, it has to be met from the capital receipts, because of which a government either borrows or sells its existing assets. This brings in a reduction in assets.
  • Also, to meet its consumption expenditure, since the government uses capital receipts, it leads to an inflationary situation in the economy.
  • With more and more such borrowings, along with interest, the burden to repay the liability also increases which, in the future, results in huge revenue deficits.

Source: Financial Express