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