6 Main Concepts of Government Deficit

This article throws light upon the six main concepts of government deficits. The concepts are: 1. Budgetary Deficit (BD) 2. Monetized Fiscal Deficit (MFD) 3. Gross Fiscal Deficit (GFD) 4. Net Fiscal Deficit (NFD) 5. Gross Primary Deficit (GPD) 6. Net Primary Deficit (NPD).

Government Deficit: Concept # 1. Budgetary Deficit:

In India, the budget deficit is measured as the difference between all receipts and expenditure in revenue plus capital accounts. This bud­getary gap is usually financed by issuing 91 days treasury bills and running down on the governments cash balances with treasuries and RBI.

Therefore this traditional budgetary deficits is equal to the sum total of net addition to treasury bills issued by the government and drawn upon from its cash balance.

This budgetary deficit (BD) can be measured as:

BD = (RE + CE + NDL) – (RR + G + DB + FB)

= TB + CB, Where

RE = Revenue expenditure

CE = Capital expenditure

NDL = Net Domestic Lending

RR = Revenue Receipts

G = Grants

DB = Domestic borrowing excluding 91 days treasury bills

FB = Foreign borrowings

IB= 91 days treasury bills

CB = Govt. cash balances with treasuries and RBI.

However this is an extremely narrow concept, which reflects only a part of the resource gap in current fiscal operations.

Government Deficit: Concept # 2. Monetized Fiscal Deficits (MFD):

The traditional concept of budgetary deficit doesn’t take into ac­count the amount of new issues of govt. securities, which is under­taken by the Reserve Bank when adequate response from the public and financial institutions including banks is lacking.

The Chakravarthy Committee Report (1985) therefore recom­mended that the government deficits should be measured in terms of change in Reserve Bank credit to government which is a meaning full measure of the monetary impact of fiscal operations.

It is a fact that R.B.I, credit to government gives the full picture of the impact of fiscal operation on changes in the reserve money and the potential­ity of changes in money supply. Therefore the term monetized fiscal deficit is coined in this respect.

Monetized Fiscal deficit = Change in Reserve Bank credit to government.

In symbolic terms

MFD = TB + GS held by the R.B.I.

Where GS = dated government securities.

Thus the concept of monetized fiscal deficit means the increase in net RBI credit to the central government. This concept is broader than the conventional measure of budget deficit, but it is useful in analyzing the monetary impact of fiscal operation.

Government Deficit: Concept # 3. Gross Fiscal Deficit (GFD):

The Gross Fiscal Deficit represents the overall borrowing require­ment of the government. It is measured as the difference between government expenditure and net lending on the one hand and cur­rent revenue and grants on the other.

That is:

GFD = (RE + CE + NDL) – (RR + G)

= FB + DB + TB + CB GFD is a comprehensive measure of macroeconomic imbal­ance. It reflects the overall resource gap in fiscal operations.

Government Deficit: Concept # 4. Net Fiscal Deficit (NFD):

In the federation like India the Central government, extensively lends out of its borrowings to the state and local governments and public sector enterprises. In this case the concept of net fiscal deficit is more important. Net Fiscal Deficit is derived by deducting from gross fiscal deficit, the net domestic lending.

That is:

NFD = GFD – NDL = (RE + CE) – (RE + G)

However in the lending operations, International Monetary fund make use of the concept of Fiscal deficit, without making a distinc­tion between gross and net fiscal deficit.

Government Deficit: Concept # 5. Gross Primary Deficit (GPD):

Primary deficit is essentially a non-interest deficit. Gross primary deficit is measured as:

GPD = GDF – NIE, where NIE stands for net interest expenditure (i.e., total interest payments/expenditure minus interest earnings by the government.).

Government Deficit: Concept # 6. Net Primary Deficit (NPD): 

Net Primary deficit is measured as NPD = NDF – NIE It should be noted that primary deficit is a good indicator of the indebtedness of the government under current fiscal operations. It is an important index to check the debt trap situation.

What is needed is that the government should take earnest efforts to reduce the volume of revenue deficit, which is inflationary in character. This can be done by scaling down non-plan outlays.