There can be different forms of deficit in a Budget depending on the type of receipt and expenditure taken into account. Revenue deficit is that which occurs when the government's total revenue expenditure exceeds its total revenue receipts. This includes those transactions that have a direct impact on the government's current income and expenditure and happens when the actual amount of revenue and/or the actual amount of spending do not correspond with the budgeted revenue and expenditure.
What is the difference between revenue deficit and fiscal deficit?
A revenue deficit should not be confused with the fiscal deficit. If the government has a revenue deficit, it means that its income cannot cover its expenditure. A country’s fiscal deficit, on the other hand, is the total money spent by the government in excess of its income, with the income figure including only taxes and other revenues and excluding money borrowed to make up the shortfall.
How is revenue deficit calculated?
Revenue deficit can be calculated by subtracting total revenue expenditure from total revenue receipts. It is important to note that revenue receipts neither create liability nor lead to a reduction in assets. The opposite of revenue deficit is revenue surplus, which arises when the actual amount of net income exceeds the projected amount of expenditure. Supposing the level of fiscal deficit remains the same, a higher revenue deficit would be considered worse because that would imply a higher repayment burden in the future not matched by benefits from investment.
Revenue deficit can be divided into two categories — receipt from tax (direct tax, indirect tax), and receipt from non-tax revenue.
How is revenue deficit met?
To remedy a revenue deficit, the government can choose to increase taxes or cut expenses. If not remedied, a revenue deficit can adversely affect the government’s credit rating. Running a revenue deficit may place the government’s planned expenditures in jeopardy, as there aren't enough funds to cover the cost. The government should try to reduce its expenditure and avoid unnecessary expenditure. By identifying and employing cost-cutting measures, the government can avoid revenue deficit.
Revenue deficit indicates dissaving on the government account because the government has to make up the uncovered gap by drawing upon capital receipts, either through borrowing or through the sale of its assets.