Public Debt, Government Budget and Deficits

The government budget

The government budget is a statement of the estimated receipts and estimated expenditure of the government for a financial year (in India, 1 April to 31 March). It is presented to the legislature (Parliament, or the Andhra Pradesh Legislative Assembly for the state budget) and, once approved, authorises the government to collect revenue and incur expenditure. A budget is conventionally divided into two parts:

• Revenue Budget — comprising revenue receipts (tax and non-tax revenue that neither creates a liability nor reduces an asset) and revenue expenditure.
• Capital Budget — comprising capital receipts (borrowings, recovery of loans, disinvestment proceeds — items that either create a liability or reduce an asset) and capital expenditure.

Public debt

When the government's expenditure exceeds its revenue receipts, it must borrow to bridge the gap; the accumulated stock of such borrowings is the public debt. Public debt is classified in several ways:

• Internal debt — borrowed from within the country (banks, financial institutions, the public, through instruments like government securities and treasury bills).
• External debt — borrowed from foreign governments, international institutions (e.g. the World Bank) or foreign markets, usually repayable in foreign currency.
• Productive debt — raised to create income-generating assets (e.g. for irrigation projects, railways), which is expected to be self-liquidating over time.
• Unproductive (dead-weight) debt — raised to meet expenditure that creates no corresponding asset (e.g. financing a war or a revenue deficit), and which must be repaid out of future taxation.

Budgetary deficits

The gap between the government's receipts and expenditure is measured in more than one way, and each measure carries a different meaning:

• Revenue Deficit = Revenue Expenditure − Revenue Receipts. It shows the government is unable to meet even its day-to-day (consumption-type) expenditure from its current revenue, and is financed by borrowing that does not create any asset — a matter of concern because it implies borrowing to consume.

• Fiscal Deficit = Total Expenditure − Total Receipts excluding borrowings. It represents the government's total borrowing requirement for the year — how much it must borrow, from all sources, to finance its full budget. A large, persistent fiscal deficit can push up interest rates, crowd out private investment, and — if financed by the central bank — fuel inflation.

• Primary Deficit = Fiscal Deficit − Interest Payments. Because a part of the fiscal deficit merely reflects interest due on past borrowing, the primary deficit isolates the government's current borrowing requirement, i.e. how much it is borrowing over and above what is needed just to service old debt. A shrinking primary deficit signals that fiscal consolidation is genuinely underway.

Deficit financing

Deficit financing refers to the methods by which the government covers the gap between its expenditure and its revenue — chiefly through market borrowing (issuing government securities and treasury bills) and, historically, through short-term borrowing from the central bank against ad hoc treasury bills (a practice discontinued in India after 1997). To bring discipline to the persistent fiscal and revenue deficits of the 1990s, India enacted the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which set targets for progressively reducing the fiscal and revenue deficits as a percentage of GDP.

The classical–Keynesian contrast on the budget …