Fiscal Deficit Part-2

In the first part we talked about the basic definition of fiscal deficit and its implications. The second part will be emphasized on the measures explaining how the fiscal deficit should be met.

HOW IS THE FISCAL DEFICIT MET?

When drastic cut in public expenditure and revenue expenditure fails to solve the fiscal deficit problem, it is met by these following measures:

• Borrowing from domestic sources: Fiscal deficit can be met by borrowing from domestic sources for example public and commercial banks. It also includes tapping money deposits in provident fund and small saving schemes. Borrowing from the public is better than deficit financing (printing of extra notes/currency) because it does not lead to increase in money supply which considered the main reason of rising prices.
• Borrowing from external sources: Borrowing from external sources such as WORLD BANK, IMF, and other foreign banks is also a good option for the government.
• Deficit financing: The government can borrow from the central bank(RESERVE BANK OF INDIA in case for India). Government issues treasury bills which the central bank buys in return for cash from the government. This cash is created by the central bank by printing new currency notes against the government securities. Its implication is that money supply increases in the economy creating inflationary trends and other ills that could result from this method. Therefore, if at all it is unavoidable, it should be kept in safe limits.

OTHER MEASURES TO DEAL WITH FISCAL DEFICIT ARE:

• A drastic reduction in expenditure on major subsidies, bonus, leave encashment etc.
• Austerity steps to curtail non- plan expenditure.
• Tax base should be broadened and reduction in taxes should be curtailed.
• Tax evasion should be effectively checked.
• Restructuring and sale of shares in public sector units.

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