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Fiscal Deficit

Updated on July 18, 2023

Fiscal deficit refers to the situation when a government’s total expenditures exceed its total revenues in a given period. In simple terms, it means that the government is spending more money than it is earning. To cover this gap, the government may need to borrow money by issuing bonds or taking loans. The fiscal deficit is an important indicator of a government’s financial health and can impact the overall economy. It is often used to assess a government’s fiscal discipline and the sustainability of its spending patterns.

What is the impact of fiscal deficit on the economy?

Interest Rates and Inflation – Larger fiscal deficits can lead to higher interest rates and potential inflationary pressures.

Reduced Economic Stability – Persistent fiscal deficits can undermine economic stability and confidence in the government’s financial management.

Crowding Out Private Sector – High fiscal deficits can limit private sector investment by absorbing available funds in the financial markets.

Exchange Rate and External Imbalances – Fiscal deficits can impact exchange rates and trade balances, especially if financed through external borrowing.

Long-Term Implications – Persistent fiscal deficits can lead to a larger debt burden, increased interest payments, and limited fiscal flexibility, affecting resource allocation and future economic challenges.