What Is Revenue Deficit?

Governments all around the world generate revenue by selling licenses and permits, imposing direct and indirect taxes, from dividends and profits from state-owned companies and through public-private partnerships. The collected revenue is used to meet the various expenses and carry out developmental and non-developmental activities in their respective countries. 

However, despite their best efforts, governments sometimes may find it difficult to meet their expenses with just their revenue alone. Economists have coined the term ‘revenue deficit’ to refer to such situations. Read on to get to know all about this unique concept. 

What Is Revenue Deficit? 

A government incurs two different kinds of expenditures – capital expenditure and revenue expenditure. The expenses that the government incurs for acquiring, upgrading or maintaining assets like infrastructure, technology and human capital are classified as capital expenditure. Meanwhile, the expenses in connection with the regular functioning of the government are termed revenue expenditure. Revenue expenditure doesn’t create any kind of assets. 

Sometimes, a government’s total revenue collection may fall short of its total revenue expenditure, creating a revenue deficit. It is a crucial metric that economists use to gain insights into the financial health of a government and its economy. The wider the deficit, the more stressed the financial health of a country is deemed to be. 

Understanding Revenue Deficit With an Example 

Now that you’re aware of the meaning of revenue deficit, let’s try to understand the concept in a bit more detail. 

There are two main components involved in determining revenue deficit – total revenue and revenue expenditure. As you’ve already seen, revenue expenditure refers to the expenses associated with the routine functioning of the government and includes costs like salaries, subsidies and debt interest payments, among others. Total revenue, meanwhile, includes revenue from the imposition of direct and indirect taxes and other non-tax revenues like fines and license fees. 

The revenue deficit formula that economists use involves the use of these two components. Here’s a quick look at the mathematical formula. 

Revenue Deficit = Total Revenue Expenditures – Total Revenue

Now, let us look at a hypothetical example to understand how countries and economists compute revenue deficits. Say that the total revenue of a country during the financial year 2022-2023 is ₹55 lakh crores and its total revenue expenditure during the same period comes up to ₹68 lakh crores. The revenue deficit in this case would be as follows. 

Revenue Deficit = ₹13 lakh crores (₹68 lakh crores – ₹55 lakh crores)

How Bad Is Revenue Deficit for a Country? 

Although it is possible for a country to not have a revenue deficit at all, practically, it is extremely challenging to maintain a surplus. Instead, the primary focus of a government is to ensure that the revenue deficit is at manageable levels at all times. 

A widening deficit or sustained periods of revenue deficit can be very damaging to an economy since the government would be forced to borrow more to cover its revenue expenditures. The increased borrowing would in turn lead to higher interest payments, putting more pressure on the economy. 

How Is a Revenue Deficit Different from a Fiscal Deficit? 

Fiscal deficit is another very important metric that economists consider when evaluating the financial health of an economy. While a revenue deficit takes only the country’s revenue expenditures into account, a fiscal deficit considers both revenue and capital expenditures. Since it considers both types of expenditures, economists often prefer using fiscal deficit since it gives them a far more comprehensive overview of a country’s financial situation. 

Is the Concept of Revenue Deficit Only Applicable to Governments?

The term revenue deficit is widely used to refer to the mismatch in the inflow and outflow of revenue in a country’s economy. However, the concept is not unique to it alone. In fact, the term is used to refer to a mismatch in revenues and expenses in businesses as well. That said, the way governments and businesses tackle the deficit will vary quite significantly. 

How Can Revenue Deficit be Reduced? 

There are many ways through which revenue deficit can be managed effectively. Both governments and businesses typically employ a range of different measures to reduce the mismatch in their finances. Here’s a quick overview of some of the tactics that are commonly used. 

• Borrowing or Raising Money 

One of the easiest ways to bridge the revenue deficit is to borrow funds and use them to manage the revenue expenditures and other obligations. In the case of businesses, they can also raise money by selling their shares to institutional investors or to the public via an Initial Public Offering (IPO) and use the proceeds to tide over their financial expenses. However, increasing borrowing to reduce revenue deficit is a double-edged sword and can end up adding to the financial burden by increasing interest payments if not kept in check. 

• Selling Assets 

Monetising assets by selling them is a good way to gain access to additional funds. The proceeds from the sale can be used to bridge the gap in finances. The Indian government, for instance, carried out a major divestment exercise in the financial year 2022-2023, where it sold its entire stake in Air India and about 3.5% of its stake in the Life Insurance Corporation of India (LIC). The divestment exercise yielded about ₹35,294 crores, which was used to reduce the country’s revenue and fiscal deficits. However, such asset sales are a stop-gap measure and cannot be sustained in the long run. 

• Reducing Expenses

Another way through which revenue deficit can be managed is by reducing non-capital expenditure. In the case of governments, this would mean reducing subsidies since they usually take up a major part of the income. Meanwhile, businesses usually resort to laying off employees and reducing marketing and advertising. Unlike the other methods, expense reduction only offers limited room for managing deficits. 

Conclusion

Revenue deficit is a serious concern for both companies and governments. Although a deficit in revenue for a year or two is considered acceptable, it can quickly spiral out of control if proper measures are not put in place. A sustained mismatch in inflows and outflows can increase inflationary pressure in the economy, leading to higher interest rates. Additionally, it can also impede the government’s ability to allocate funds toward development. 

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