An Explainer: Fiscal Deficit

Many times we come across the term fiscal deficit when read any government announcement regarding the economy and any budget-related news. Not many among us know its exact meaning although it finds a regular use in our day-to-day parlance. So what is it? And, how does it affect us?

Definition-wise, fiscal deficit is when a country's total expenditure exceeds the revenue it generates. So, when you see an increase in the fiscal deficit it means that the country is spending more than what it is earning. Fiscal deficit is generally expressed as a percentage of its GDP (gross domestic product). The current NDA-government in India has a fiscal deficit target of 3.9 per cent of GDP in the current financial year and plans to bring it down to 3.5 per cent in 2017.

Does it depend only when spending is more than creation?

It does not depend entirely on this reason alone. One major reason for a rise in the fiscal deficit could be the slow pace of economic activities and the tardy economic growth. And, also, for example, if the government brings down taxes for any political/social reason, then it would mean less earning, leading to an increase in fiscal deficit.

What does the fiscal deficit number signify?

It gives a fair idea about the health of the country's economy and how much money a country needs to borrow from its sources to meet its obligations. Inflation acts like an invisible tax on all the people of a country.

So is it always bad to have a fiscal deficit?

Not necessarily. A fiscal deficit is regarded by some as a positive economic event. If the money that the government had borrowed was used for asset creation, then the fiscal deficit situation can bring dividends for the country. Fiscal deficit numbers propel you to find out more resources to meet your targets and hence the country thrives for greater economic development.