Page 56 - Banking Finance December 2024

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Fiscal Deficit Public Debt: Persistent fiscal deficits can increase public
debt, leading to higher future interest obligations.
A fiscal deficit occurs when a government's total expenditures
exceed its total revenues, excluding money from borrowings, Positive Aspects: In some cases, a fiscal deficit can be
within a specific fiscal period, usually a year. It essentially positive, especially if the borrowed funds are used for
indicates that the government is spending more than it is productive investments like infrastructure, education, and
earning from taxes and other sources of income. health, which can stimulate economic growth and
development.
Key Components of Fiscal Deficit
Sustainability: The sustainability of a fiscal deficit is a critical
Expenditures: This includes all government spending, such consideration. It depends on the country's ability to service
as on public services, infrastructure projects, defence, social and repay its debt without resorting to excessive inflation
welfare programs, salaries of public employees, interest
or other destabilizing economic measures.
payments on existing debt, and more.
Fiscal Deficit as a Percentage of GDP
Revenues: These are the funds the government receives,
primarily through taxes (like income tax, corporate tax, Fiscal deficit is often expressed as a percentage of Gross
sales tax, etc.), but also from non-tax sources such as fees, Domestic Product (GDP) to give a relative measure of the
fines, and income from public enterprises. deficit's size compared to the economy. This ratio helps in
assessing the magnitude of the deficit and comparing it with
other countries or historical data.
Implications of Fiscal Deficit
Financing the Deficit: To finance a fiscal deficit, a Managing Fiscal Deficit
government typically borrows money, either from domestic Governments aim to manage fiscal deficits by:
or international sources. This borrowing can take the form Enhancing revenue collection through improved tax
of issuing government bonds, taking loans, or other financial administration and expanding the tax base.
instruments. Controlling public expenditure and ensuring efficient use
of resources.
Economic Impact: A fiscal deficit can have various effects
on the economy. Implementing structural reforms to boost economic
growth, which can increase revenues.
Inflation: If the government finances the deficit by printing Fiscal deficits have had significant impacts on various
more money, it could lead to inflation. countries' economies, sometimes leading to severe financial
crises. Here are some critical examples:
Interest Rates: Borrowing can lead to higher interest rates
as the government competes with the private sector for 1. Greece (2010 Debt Crisis)
available funds. Context: Greece faced a major fiscal deficit crisis in 2010,
which revealed underlying structural weaknesses in its
economy. For years, Greece had been running large fiscal
deficits, fuelled by extensive public sector spending, generous
pension systems, and tax evasion issues.
Impact:
Debt Levels: By 2009, Greece's public debt had ballooned
to over 130% of GDP. The country's fiscal deficit reached
15.4% of GDP, far above the Eurozone limit of 3%.
Austerity Measures: To secure bailouts from the European
Union (EU) and the International Monetary Fund (IMF),
Greece had to implement harsh austerity measures. These
included deep cuts to public spending, tax hikes, and
structural reforms.

50 | 2024 | DECEMBER | BANKING FINANCE