What is revenue deficit and what are its implications on budget?

Revenue deficit indicates the excess of expenditure over receipts in the revenue budget of the government.

To understand the implications of revenue deficit, various items under the revenue budget is to be understood well.

Revenue budget

Revenue budget involves those receipts and payments coming out of the day to day activities of the government. Don’t misunderstand that the Revenue budget is aimed at describing revenue generation activities of the government. The revenue budget, on the other hand, is actually related to the day to day functioning of the government. Revenue budget is recurring or current in nature.

Really, revenue expenditure is considered as unproductive expenditure because it is mainly used for the running of the government machinery. Revenue budget is technically current in nature- means items related to day to day functioning of the government. Expenditure is needed to finance government functions like defense; social services, administration etc. are the usual types of revenue expenditure.

Similarly when the government is performing its day today functions, lot of revenue will be accrued to it. These revenues are called as revenue receipts. Tax revenues and non tax revenues are the major revenue receipts. Non tax revenue receipts include revenue from currency coinage and mint and profits from Public Sector Enterprises etc.

  • Important revenue expenditure are: interest payments (for the borrowing that the government has made in the past), defence (almost 70% of the defence expenditure are revenue expenditure), subsidies (subsidy is not a productive item for the government as there is no return from it for the government), salaries etc.
  • Important revenue receipts are: tax revenues including corporate income tax, personal income tax, customs duties, service taxes etc, and non tax revenues including revenue from mint, profits from Public Sector Enterprises etc.

Implications of revenue deficit

Revenue deficit means the government is not able to finance its day to day expenses or what we call the current expenditure out of its normal revenue sources like taxes.

If the government has revenue deficit (in its revenue budget), it has to make an equivalent surplus in the capital budget.

In the capital budget, expenditure are for mainly investment type activities of the government. These activities are considered to be productive as it may give a return to the government in the future.

To create a surplus in the capital budget, expenditure should be kept lower than receipts in the capital budget. The major receipt item in the capital budget is borrowings. This means that in the capital budget, productive investment expenditure should be brought down and at the same time, borrowing that creates debt in the future should be enhanced. This is the way in which a capital surplus can be created.

This capital surplus is used to finance the revenue deficit that was created out of the unproductive expenses in the revenue budget.

In India, the central government’s budget had a surplus until 1977. But in 1978 budget, revenue deficit appeared for the first time. Since then there is revenue deficit in all years and the government is borrowing to finance the revenue deficit. Borrowing this year to finance revenue deficit will create interest payments in future (which is revenue expenditure). Increasing borrowing – interest payments – revenue deficit- borrowing explains the vicious circle of debt for the government. In this way, interest payment became the largest expenditure item for the government by 1990.

The Fiscal Responsibility and Budget Management Act (FRBM 2003) aim to eliminate revenue deficit. For 2015-16, the budget estimate revenue deficit of Rs 394472 crores which is met out of borrowing in the capital budget. Borrowing or fiscal deficit is Rs 555649 crores as per the budget. This indicates that the root cause of fiscal deficit in India is revenue deficit.