The fiscal deficit is the amount spent by the Government in excess of its revenues (which it earns from collecting taxes and other sources).
The fiscal deficit is either expressed as a percentage of the country’s gross domestic product or GDP or as the actual amount, over and above the Government’s earnings.
Causes of a fiscal deficit
- A decrease in the Government’s revenues
- A decrease in tax revenues collected from public
- Increase in subsidies to be provided to the general public
- Disruption of economic activities due to some natural disaster. For ex: – The current world pandemic of COVID-19 has led to a stoppage of work in many industries and disruption in the service sector like travel, restaurant, etc. The Government is providing supplies at a subsidized rate, and a decrease in production will lead to a major decrease in economic revenues
Difference between fiscal debt and fiscal deficit
Fiscal debt is the total of debt that has accumulated over time, whereas Fiscal deficit is the excess of Government spendings over its earnings.
Is the fiscal deficit good?
It is considered healthy only when the amount which leads to the deficit is invested in projects which lead to the development of the country. For ex:- Infrastructure projects. These kinds of projects lead to further development of sectors like it helps in the smooth transportation of the goods from one place to another. Similarly, Developing a tourist place leads to the development of the travel industry and attracts foreign investments as well.
How to reduce the fiscal deficit?
The government can reduce the fiscal deficit in two ways:
1) By raising taxes and/or increasing economic activity, or
2) By reducing spending on government-run programs.