Question

What is revenue deficit?

Hint:

Revenue deficit occurs when the government's revenue expenditure exceeds its revenue receipts, indicating a need for borrowing to meet regular expenses.

Answer 1

A revenue deficit occurs when the government’s revenue expenditure exceeds its revenue receipts. In other words, it is the shortfall in the government’s earnings from taxes, duties, and other sources compared to the amount it spends on various activities. This situation indicates that the government has to borrow money to meet its regular expenditure, as it is unable to generate sufficient revenue.

Step 1: Understanding Revenue Deficit.
Revenue deficit is calculated as the difference between the government's total revenue expenditure and its total revenue receipts. It does not include capital expenditure, which is spent on long-term projects like infrastructure, and is thus different from the fiscal deficit, which includes both revenue and capital expenditure.

Step 2: Causes of Revenue Deficit.
The main causes of revenue deficit are:
- Increase in Government Spending: If the government increases its spending without a corresponding increase in revenue, a revenue deficit occurs.
- Lower Tax Collection: If the government’s tax collection decreases due to economic downturns or tax evasion, it can lead to a revenue deficit.
- Subsidies and Welfare Schemes: Increased expenditure on subsidies, pensions, and welfare schemes can also contribute to a higher revenue deficit.

Step 3: Implications of Revenue Deficit.
A revenue deficit is a concern for the economy because it indicates that the government is not able to finance its regular activities from its own revenue. This leads to borrowing, which could increase the national debt. If not controlled, it may result in inflation and devaluation of the currency.