All about Revenue Deficit

  • Ashesh Anand
  • Oct 25, 2021
  • Economics
All about Revenue Deficit title banner

The term "Budget Deficits" refers to a scenario in which the government's budget expenditures exceed its budget receipts. Depending on the sort of receipts and expenditures considered, a Budget might have various types of deficits. Revenue deficits, fiscal deficits, and primary deficits are the three forms of budget deficits. 

 

Read more on Business Deficits.


 

What is a Revenue Deficit?

 

When realized net income falls short of planned net income, a Revenue Deficit arises. This occurs when real revenue and/or actual expenditures do not match anticipated revenue and expenditures. This is the polar opposite of a revenue surplus, which happens when actual net income surpasses planned net income. 

 

This indicates that the government's own profits are insufficient to fund its departments' day-to-day activities. When the government spends more than it makes, it is forced to borrow money from other sources to make ends meet.

 

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So we understood these points about Revenue deficit:

 

1. It is a measure of the government's expenses as well as the use of savings from other sectors to fund a portion of its expenditure.

 

2. It demonstrates that the government would need to borrow money not only to finance its investment but also to meet its consumption needs.

 

3. It accumulates debt and interest liabilities, forcing the government to cut spending.

 

Hence, Revenue Deficit refers to a shortfall in revenue. Budgeting is traditionally divided into two accounts: revenue account and capital account.

 

( Also Read: What is Inflation? Demand-pull and Cost-push )

 

Revenue Deficit Formula

 

Revenue Expenditure – Revenue Receipts = Revenue Deficit

 

Or

 

Total Revenue Expenditure – (Tax Revenue + Non Tax Revenue) = Revenue Deficit


 

The term "revenue deficit" refers to the difference between the government's revenue receipts and expenditures. Revenue receipts, on the other hand, are those that do not result in a liability or a loss in assets. It is then subdivided into two sections:

 

1. Tax Receipt (Direct Tax, Indirect Tax)

 

2. Non-Tax Revenue Revenue Receipts 


 

The term "expenditure" refers to spending that does not result in the development of assets or the reduction of obligations. It's further broken down into two categories:

 

1. Plan revenue expenditure

 

2. Non-plan revenue expenditure

 

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What is a revenue account, exactly?

 

The Revenue Account refers to the revenue on the current account, which includes both tax and non-tax income from the government. The money earned by the government's various taxes, such as income tax, gift tax, customs duty, GST, and so on, is referred to as tax receipts. 

 

Administrative revenue, commercial revenue from public sector undertakings, gifts, and contributions, penalties, money from the sale of spectrum, escheat, and fees such as court fees, fines, and so on are all examples of nontax revenues.

 

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Expenditure on the Revenue Account is a type of government spending that is used to buy goods and services for consumption within a certain fiscal year. As a result, this spending is referred to as consumption expenditure. Salaries, interest payments, and subsidies are all examples of this.


The image depicts that if a company or entity estimates a certain amount of income in a year and the net income falls short of the estimated income, a case of Revenue deficit occurs.

This is how Revenue Deficit Occurs



Read this article on How The United Kingdom saw a rise in the budget deficit to the highest rate since 1946


 

Understanding Revenue Deficit

 

The difference between the expected and actual quantity of income is measured by a revenue deficit, which is not to be confused with a fiscal deficit. A revenue deficit indicates that a company's or government's income is insufficient to support its basic operations. When this happens, it may borrow money or sell existing assets to make up for the drop in revenue.

 

( Suggested: Introduction to Gross Domestic Product (GDP) )

 

To close a revenue gap, a government might either raise taxes or decrease spending. Similarly, a firm with a revenue deficit might increase its profitability by reducing variable expenses like materials and labor. Because most fixed expenses are determined by contracts, such as a building lease, they are more difficult to alter.

 

 

How Revenue Deficit is different from Fiscal Deficit

 

The existing budget's revenue deficit reflects indebtedness due to overall income receipts and spending proposed in the budget. When revenue spending exceeds revenue collection, this is known as a revenue deficit. This section covers all transactions that have an impact on the government's current revenue and spending.

 

Fiscal deficit, on the other hand, is a metric that indicates how reliant the government is on borrowing. The fiscal deficit represents the government's projected borrowings; the larger the fiscal deficit, the higher the government borrowings.

 

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Consequences of a Revenue Deficit

 

The following are the repercussions of a revenue shortfall:

 

  1. Asset Reduction

 

The government must borrow or sell assets to satisfy its revenue expenditures. This way, they could manage some of their revenue deficit easily.

 

 

  1. Loss of Social Welfare

 

 The government may be forced to cut spending on a variety of welfare programs and public subsidies, resulting in a loss of social welfare.


The image depicts the different implications caused by the Revenue deficit. This includes Reduction in assets, Loss of Social Welfare, Increase in liabilities, and decrease in creditworthiness, Disinvestment as well as Inflation.

Implications of Revenue deficit


  1. Increased liabilities and decreased creditworthiness

 

 The government may need to borrow money from the general public, the RBI, the World Bank, and other sources, which not only increases liabilities but also decreases creditworthiness.

 

 

  1. Disinvestment

 

The government has the option of disinvesting, which entails selling a stake in a public sector business to either foreign firms or private people.

 

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  1. Inflation

 

The government uses capital receipts to satisfy consumption expenditures. Because borrowed money does not qualify as investments, they are utilized for consumption, resulting in inflation.
 

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Example of Revenue Deficit

 

Company XYZ forecasted $100 million in revenue for 2018 and $80 million in expenses, resulting in a predicted net income of $20 million. The company's actual revenue was $85 million, while its expenditures were $83 million, resulting in a realized net income of $2 million at the end of the year. This resulted in an $18 million revenue shortfall.

 

Both the expenditures and revenue estimates were wrong, which might have a detrimental impact on future operations and cash flows. If the topic of this example were a government, financing for necessary public expenditures like roads and schools may be compromised.

 

The firm may avoid future revenue deficits by identifying and implementing cost-cutting initiatives. It can look into more cost-effective business models, such as identifying suppliers that can provide goods at a reduced cost or vertically integrating operations throughout its supply chain. The firm might also spend on employee training to improve productivity.
 

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Bottom Line: How is the Revenue Deficit resolved?

 

The term "revenue deficit" refers to a shortfall that can be made up by capital receipts, such as borrowings. But, to be more specific, it is a future payback burden that does not correspond to any investment.

 

To close a revenue gap, the government can either raise taxes or decrease spending. A revenue imbalance, if not addressed, can hurt the government's credit rating. Because there isn’t enough money to pay the expense of a revenue gap, the government's projected expenditures may be jeopardized. 

 

The government should make every effort to save costs and eliminate needless spending. The government may prevent a revenue deficit by identifying and implementing cost-cutting initiatives.

 

Because the government must replace the uncovered difference with capital receipts, either via borrowing or the sale of its assets, the revenue deficit reflects dissaving on the government account.

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