What is meant by fiscal deficit and fiscal surplus in budget?

When the expenditures of a government are more than its revenues in a given financial year, it is known as fiscal deficit. When the revenues of the government are more than the expenditures, then it is known as fiscal surplus.

A government earns revenues from the taxes that it collects from citizens and businesses. It also earns revenues from dividends paid by public sector undertakings (PSUs) to it. PSUs are companies in which the government is a shareholder.

The expenditures of the government include the payment of salaries to government employees and officials; expenditures on public goods such as public infrastructure projects; welfare schemes for citizens, such as unilateral transfers; and interests that the government pays on its current borrowings.

It is often difficult for governments to have a budget that is fiscally balanced or in fiscal surplus. In order to give boost to the economy, governments often resort to expansionary fiscal policy. An expansionary fiscal policy is one in which the government keeps its expenditures high to give boost to the economy. The GDP of a country is the sum of four components. These are Consumption, Private Investment, Government Expenditure and Net Exports. So if Government Expenditure goes up, it may give a boost to the GDP.

But higher government expenditure often results in fiscal deficit in the budget. It is a good thing that the fiscal deficit of the government does not go up too much. To finance the fiscal deficit, the government has to resort to borrowing from the public. If the government borrows too much, then interest rate goes up for private citizens and businesses. This is because lenders charge more from private entities than what they charge from the government. This is because the credit risk of the government is lower than that of private entities in the case of debt denominated in domestic currency. The government can always resort to printing more currency to pay off its debt obligations. This facility is not available to private entities and businesses.

At the time of announcing every budget, the government announces its fiscal target for the year. In FY 24, the Indian government set a fiscal deficit target of 5.9% of GDP. This target means that the government will try to keep fiscal deficit within 5.9% of GDP in FY 24.