FISCAL DEFICIT (Syllabus: GS Paper 3 – Economy)

Context: The Centre’s fiscal deficit came in at 55% of the budget estimate (BE) in the first nine months of the current financial year, compared with 59.8% of the respective target in the year-ago period, the data released by the Controller General of Accounts.

Fiscal Deficit

• About: It is the gap between the government's overall income (including taxes and non-debt capital receipts) and its total expenditure excluding any borrowed funds.
• Fiscal Deficit = Total expenditure of the government (capital and revenue expenditure) – Total income of the government (Revenue receipts + recovery of loans + other receipts).
• Causes of fiscal deficit arise: When government spending surpasses its income.

oIt represents the extent to which the government has spent more than its earnings, usually presented as a percentage of the GDP.

• Fiscal Responsibility and Budget Management (FRBM) Act: It was established in 2003, aiming to establish targets for reducing fiscal deficits. It made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:

1.Medium Term Fiscal Policy Statement

2.Macroeconomic Framework Statement

3.Fiscal Policy Strategy Statement.

oAim: To eliminate revenue deficit of the country (building revenue surplus thereafter) and bring down the fiscal deficit to a manageable 3% of the GDP by March 2008.

• N K Singh Committee's recommendations were as follows:

oTargets: The committee suggested using debt as the primary target for fiscal policy and that the target must be achieved by 2023.

oFiscal Council: The committee proposed to create an autonomous Fiscal Council with a chairperson and two members appointed by the Centre (not employees of the government at the time of appointment)

oDeviations: The committee suggested that the grounds for the government to deviate from the FRBM Act targets should be clearly specified.