Know your budget: Revenue and primary deficits

Revenue and primary deficits

All deficits occur when a government's expenditure exceeds its revenues. However, three types of deficits – fiscal, primary and revenue differ from one another in a small measure.

What is revenue deficit?

It is a result of a mismatch between expected revenue and expenditure. Revenue deficit arises when the government's actual net receipts are lower than the projected receipts. Unlike fiscal deficit, it is not indicative of loss of revenue.

If not loss of revenue then what is it?

Revenue deficit occurs when the actual amount of revenues and the actual amount of expenditures do not correspond to the estimates made in the Budget. It is the difference between projection and actualisation.

So, can a govt continue to run revenue deficit?

No, if revenue deficit continues to occur over a period of time, it can adversely impact the credit rating of a government. Therefore, the Fiscal Responsibility and Budget Management Act of 2003 gave as much importance to revenue deficit as fiscal deficit.

What does FRBM prescribe?

Revenue deficit should be reduced by 0.5% of GDP per year with complete elimination to be achieved by 2008-09.

Revenue deficit target was extended in 2009?

The deadline for meeting fiscal and revenue deficit targets was extended to March 31, 2015.

The revenue deficit target was raised to 2%. Effective revenue deficit target to be eliminated by March 31, 2015 and thereafter build up adequate effective revenue surplus. After repeated failures to meet the target, it was again extended till 2017-18.

What is a primary deficit?

Primary deficit is the difference between the fiscal deficit of the current year and the interest paid on the borrowings of previous years. In other words, when the primary deficit is added to interest payment, it is called a fiscal deficit. Primary deficit indicates the total borrowing requirements of the government excluding interest payments. So, if the interest amount is deducted from the total government loan, it is the primary deficit.

Why fiscal deficit is treated as a more important indicator than other deficits?

It is through fiscal deficit indicator that a government decides how to readjust its revenues and expenditures and which tool to apply in what measure — whether to increase taxes or increase borrowings or reduce expenditure or print money to meet excess expenses.

What is debt?

If the deficits keep accumulating year after year, they become debt.