Budget Deficit
and Fiscal
Policy
Budget
• Budget refers to a list of all planned
expenses and revenues of an organisation
• A government budget consists of:
• Budget on Revenue Account – Current
expenditure
• Capital Budget – Economic and Social
development expenditures
Government Expenditure & Receipts
There are three types of government
spending
• Government consumption
• Transfer payments
• Government Investments
Government spending can be financed by:
• Seigniorage
• Taxes
• Government Borrowing
Government Expenditure & Receipts
• Expenditure
• Revenue Expenditure
• Capital Expenditure
• Receipts
• Revenue Receipts
• Capital Receipts
Government Expenditure (% of GDP)
.
Government Expenditure (% of GDP)
Revenue Expenditure
Government Expenditure (% of GDP)
Capital Expenditure
Government Receipts(%of GDP)
.
Government Receipts (% of GDP)
Revenue Receipts
Government Receipts (% of GDP) Capital
Receipts
Types of Deficit
• Revenue deficit - the difference between
revenue receipts and revenue expenditure
• Budget deficit - the difference between all
receipts and expenditure, both revenue
and capital
• Fiscal deficit – the difference between
revenue receipts and total expenditure
• Primary deficit – the difference between
current government spending and total
current revenue from all types of taxes
Government Deficit
.
Government Deficit
Gross Fiscal Deficit
Government Deficit
Gross Primary Deficit
Government Deficit
Revenue Deficit
Financing Fiscal Deficit
• Increase in taxation
• Shift of industry
• Lesser spending will reduce jobs
• Monetizing debts
• Printing money to finance government debt can
increase inflation
• Issuing long-term government bonds or shorter
term notes and bills
Monitoring Budget Deficits
Why a monitoring system required:-
• To keep deficits within reasonable limits
• Timely action in time when Gap increases out of reasonable limits
Challenges in monitoring budget deficits:-
• The task for deriving monthly norms is complex due to unclear
discernible pattern or regularity in fluctuations and movements of the
monthly deficits over the year.
• A degree of seasonality in monthly patterns due to variations in
government’s expenditure and revenue flows
• Natural calamities like flood and draught can affect government’s
revenue flow and expenditure.
Forecasting Deficits
Deriving monthly norms for monitoring
-variations marked by identifiable patterns (seasonal
and Intra-year or secular and Inter-year)
Statistical techniques - Isolating seasonal and
trend influences in a time series which can be used
for forecasting monthly deficits based on past figures.
Estimating norms for each month in a given
year based on the targeted deficits of the year
To forecast the likely level of the deficit for the
remaining months
Budget Deficits- Estimated and Revised
(In Rs. Crores)
1980 1981 1982 198 198 198 198 198 198 1989-
-81 -82 -83 3-84 4-85 5-86 6-87 7-88 8-89 90
At the 2576 1392 1656 141 374 531 826 581 564 11466
end of 6 5 5 1 6 2
March
(Actual)
Budget 1445 1539 1375 158 177 331 370 568 748 7337
Estimate 6 3 6 3 8 4
Revised 1975 1700 1935 169 398 449 828 608 794 11750
Estimate 5 5 0 5 0 0
Statistical Methods of Forecasting
• Components: secular, cyclical, seasonal, random
movements.
• Methods for evaluation and forecasting:
• Average Relatives
• Monthly Trend Equations
» ln(D) = α+βt
• Link Relatives
• Multiple Regression Analysis
» Dm = a + b1 M + b2 ln(M) + b3 BE
• Box-Jenkins Models
» a(L).ap (Lp).(1-L)d(1-Lp)Dxt = A+ b(L).bp (Lp).et
Estimated Month-End Deficits by Alternate Methods for 1989-90
(in Rs. Crores)
Month Actual Trend Box Multiple Average Link
Deficit Method Jenkins Regression Ratio Relative
April 4628 8778 3914 5717 2344 5031
May 6777 17158 4733 7193 4384 5579
June 9852 23685 6719 7952 8070 9586
July 11390 26122 5966 8417 6148 8087
August 12403 12778 6472 8721 9921 8610
September 12431 11982 6704 8923 9990 8809
October 11151 15011 6821 9055 9505 8426
November 13082 14871 7513 9135 11127 10267
December 11789 18873 7389 9176 8594 8967
January 14504 18341 8144 9186 9877 10314
February 13908 17741 9221 9171 10587 10667
March 11466 8920 6151 9135 7337 7337
R-Square 1.00 0.05 0.85 0.88 0.83 0.80
Estimated Month-End Deficits by Alternative Methods for 1989-90
(in Rs. Crores)
Actual
Trend Method
Box Jenkins
Multiple Regression