Fiscal deficit stands for the situation when the expenses of the government exceed its revenue. The opposite of this term is a surplus. In other words, it means the total borrowings that a country needs. The total revenue doesn’t include such borrowings.
Some scholars, such as John Maynard Keynes, believe that deficits can be beneficial for the economy as they stimulate it by giving the money to buy services and goods, and they were therefore extremely useful for helping some countries to get out of recessions.
However, many economists suggest that fiscal deficits shouldn’t be incurred by governments on a regular basis as they can lead to unsustainable economies in the future because of huge mountains of debt.
Reasons for Fiscal Deficit
- A major hike in capital expenditure.
- A revenue deficit.
If the government needs to borrow some money, they will use financial help from the central bank. Otherwise, the government may raise money by issuing bonds or treasury bills.
For example, there have been quite a few fiscal deficits in the USA since its foundation. Alexander Hamilton, who was the secretary of the Treasury at the end of the 18th century, was the first person to propose issuing bonds to pay off the national debts during the Revolutionary War. Federal deficits were created by the interest payments and they vanished once the debts were fully repaid.
Such borrowings to finance the deficit have certain implications on the future economy of the country:
- As borrowing money is the only way to get rid of the fiscal deficit, debt obligations are getting bigger with multiple borrowings.
- The government doesn’t use the borrowed money in full as this money comes in the form of a loan with interest, which also needs to be paid off.
- The economic growth of the country slows down due to these borrowings.