(This is the first of the five-part series that will explain the numbers in the Budget)
Budget is akin to ‘Rob Peter to pay Paul’. Government collects money from one set of people (tax payers) and gives out the money to another set of people (expenditure on various government schemes). Government has long stopped printing its own money to spend. If they resume, prices would spiral as more money notes will chase few things to buy. So, governments collect taxes from individuals and companies, and then spends the money on different things like defence expenditure, paying salaries/ pensions to employees, interest payments on past borrowings etc.,
When sum of taxes and non-taxes (like dividends from government-run companies) is not enough to meet the sum of all expenditure, the difference or deficit is called as ‘fiscal deficit‘. This year (that is twelve months ending March 2017), the deficit is estimated at 3.5% of GDP or Rs 533,904 crore.
To contextualize this number, lets compare the fiscal deficit with total expenditure of Rs 1,978,060 crore. This means government borrowed more than one rupee for every four rupees it spent.
Next question is how did the government bridge the deficit? Where else, the government borrowed from public, though not directly.
Having fiscal deficit is not necessarily a bad thing, if spent wisely on building infrastructure to enable faster movement of goods and people, or in helping more people into schools and colleges. But that’s not what is happening. A large part of borrowing is primarily to meet today’s expenditure like paying salaries for government employees or interest payments. So how much of borrowing or fiscal deficit is used to meet today’s expenses is captured by ‘revenue deficit‘.
Revenue deficit for current financial year is estimated at 2.3% or Rs 354,015 crore. In other words, two-thirds of borrowings is to meet today’s expenses. If the trend continues, country will slowly and surely get caught in debt spiral.
So what is the ideal situation?
1. Revenue deficit has to be reduced to zero. This is like earning Rs 10,000, but spending Rs 12,000 on monthly basis.
2. Whatever is borrowed to meet the fiscal deficit should create assets that should generate future streams of benefits.
What we are doing now is to burden the next generation to finance our fiscal profligacy.
(Part 2 will look at how much we pay our government employees).