A presentation explaining fiscal deficit, revenue deficit and primary deficit

1. National Accounts: Deficits
What are we going to learn?
 Definitions of fiscal deficit, revenue deficit and primary deficit
 Terms - plan expenditure and non-plan expenditure
 Terms - Revenue expenditure and Capital expenditure
 Why revenue deficit number is more important than fiscal deficit
 Why deficits are not per se something wrong

2. National Accounts snapshot
Non debt receipts: Rec = A + B + C
Tax revenue - A
Non-tax revenue - B
Non debt Capital Receipts - C
Total Expenditure: Exp = D + E or F + G
Revenue Expenditure - D
Capital Expenditure - E
Plan Expenditure - F
Non-Plan Expenditure - G
Gross Fiscal Deficit = Exp - Rec

3. Plan expenditure vs. Non-plan expenditure
 Plan-expenditure: Any expenditure that is incurred on programmes which are
detailed under the current (Five Year) Plan of the centre or centre’s advances to
state for their plans is called plan expenditure. Provision of such expenditure in
the budget is called Plan Expenditure.
 Non-plan-expenditure: This refers to the estimated expenditure provided in the
budget for spending during the year on routine functioning of the government.
Non- Plan expenditure is all expenditure other than plan expenditure of the govt.
Such expenditure is a must for every country, planning or no planning.
Relevant reading: http://www.economicsdiscussion.net/government/plan-and-non-plan-
expenditure-of-indian-government-micro-economics/767#sthash.h3MDxhhi.dpuf

4. Revenue Expenditure vs. Capital Exenditure
 Revenue Expenditure: Simply put, an expenditure which neither creates assets
nor reduces liability is called Revenue Expenditure, e.g., salaries of employees,
interest payment on past debt, subsidies, pension, etc. Generally, expenditure
incurred on normal running of the government departments and maintenance of
services is treated as revenue expenditure.
 Capital Expenditure: An expenditure which either creates an asset (e.g., school
building) or reduces liability (e.g., repayment of loan) is called capital expenditure.
Purchase of land, buildings, machinery, investment in shares, repayment of loans
are all capital expenditures. Such expenditures are incurred on long period
development programmes, real capital assets and financial assets.
Relevant reading: http://www.economicsdiscussion.net/expenditure/revenue-
expenditure-and-capital-expenditure-of-india-notes/749

5. Revenue Deficit
Non debt receipts: Rec = A + B + C
Tax revenue - A
Non-tax revenue - B
Non debt Capital Receipts - C
Total Expenditure: Exp = D + E or F + G
Revenue Expenditure - D
Capital Expenditure - E
Plan Expenditure - F
Non-Plan Expenditure - G
Gross Fiscal Deficit = Exp - Rec
Revenue Deficit = D - (A + B)

6. Primary Deficit
Non debt receipts: Rec = A + B + C
Tax revenue - A
Non-tax revenue - B
Non debt Capital Receipts - C
Total Expenditure: Exp = D + E or F + G
Revenue Expenditure - D
Capital Expenditure - E
Plan Expenditure - F
Non-Plan Expenditure - G
Gross Fiscal Deficit = Exp - Rec
Revenue Deficit = D - (A + B)
Primary Deficit = Revenue deficit - Interest Payments

7. Fiscal deficit vs. Revenue deficit vs. Primary deficit
 Fiscal deficit: How much shortfall is there overall? I do not care whether it is
because of revenue expenditure or capital expenditure.
 Revenue deficit: If I am investing in long-term assets and incur a deficit on that
count, then that is alright. I want to know how much deficit I have in just keeping
the lights on. For merely running the Country, how much deficit am I facing?
 Primary deficit: If I am saddled with huge debt, the interest on that debt is a
legacy I am burdened with. Let us take this also out. Now, merely keeping the
lights on without being burdened by interest payments, am I still in deficit? Yeah,
then lets call this primary deficit.

8. Fiscal vs. Revenue vs. Primary - Household parallel
 Fiscal deficit: How much shortfall is there overall? I do not care whether it is
because of you bought a house or had dinner at the Taj.
 Revenue deficit: If you are repaying housing loan, remove the capital component
of that. You are going to get a house in return, no point bringing this into deficit
calculations. If you have taken out education loan, remove that as well. The
degree has to be worth something, especially if you are going to get it from an IIM
 Primary deficit: If you are paying interest on housing loan your father took out 10
years ago, its unfair to blame you. Remove that also. Now, if you still have a
deficit and if you have to sell something to bridge this then you are in trouble.