Fiscal deficit is excess of government’s expenditure over receipts except borrowing. It represents the total borrowing requirements of the government. FD is the most important fiscal indicator to assess the health of a government budget. Higher fiscal deficit shows higher borrowings by the government to run the budget. In India, the main target of fiscal consolidation measure is to reduce fiscal deficit to 3% of GDP.
Fiscal deficit = Total expenditure – total receipts except borrowings.
Fiscal deficit thus shows borrowings of the government to run the budget. If the FD is caused by Revenue Deficit, borrowings will be used to finance day today expenditure of the government. This is undesirable. FD results in future interest payments. It also adds to inflation.
