Fiscal Deficit – Lets Understand this

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We  have   all   heard  about  it  and  we’ve   all  read   articles  in newspaper daily that

worry about a large fiscal deficit,  in India . But the question is, what is the   problem with a big fiscal deficit and what is

this Fiscal deficit.

 

Every year, the Government puts out a plan for it’s income and expenditure for the coming year.

This is  called annual   Union Budget.

 

A  budget  is   said  to  have   a   Fiscal Deficit  when   the   Government’s   expenditure   exceeds   it’s

income.

When   this   happens,   the   Government   needs  additional   funds.   Now   there   are   two   ways   for   the

Government to arrange these funds

1)       The   Government   can   borrow   either   from  the  Citizens themselves.

2)      Other Countries.

3)      Organizations like the World Bank or the IMF.

The money borrowed by a nation’s Government is called Public Debt.

 

As on any other  debt,   the   Government   promises   to   pay   a   certain   rate   of

interest. To pay this interest in the future, the Government  has three options:

 

1. Increase   the   amount   of   taxes   collected   by Increasing the tax rates.

2. Help   stimulate   economic   growth   so   that   tax collection automatically increases with it.

3. Print new currency notes to  pay  back the debt –  also called Debt Monetization.

 

We can all agree that the first option is not desirable.

That leaves   the   second   and   third   options.

While   the   second option sounds like the best one, It is not easier to implement

The third option is dangerous and can act like an unfair and invisible tax on the people of a  country.

 

I’ll explain in my future posts why 3rd option is Dangerous….

 

Your views/feedback are welcome.

 

Regards

Finance_Doctor

 

 

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