Description
This is document describes about report on economics.
A budget deficit occurs when an entity (often a government) plans to spend more money than it takes in. The opposite of a budget deficit is a budget surplus. Debt is essentially an accumulated flow of deficits. In other words, a deficit is a flow and debt is a stock. An accumulated deficit over several years (or centuries) is referred to as the government debt. Government debt is usually financed by borrowing, although if a government's debt is denominated in its own currency it can print new currency to pay debts. Monetizing debts, however, can cause rapid inflation if done on a large scale. Governments can also sell assets to pay off debt. Most governments finance their debts by issuing long-term government bonds or shorter term notes and bills. Many governments use auctions to sell government bonds. Governments usually must pay interest on what they have borrowed. Governments reduce debt when their revenues exceed their current expenditures and interest costs. Otherwise, government debt increases, requiring the issue of new government bonds or other means of financing debt, such as asset sales. According to Keynesian economic theories, running a fiscal deficit and increasing government debt can stimulate economic activity when a country's output (GDP) is below its potential output. When an economy is running near or at its potential level of output, fiscal deficits can cause inflation.
Primary deficit, total deficit, and debt The government's deficit can be measured with or without including the interest it pays on its debt. The primary deficit is defined as the difference between current government spending and total current revenue from all types of taxes. The total deficit (which is often just called the 'deficit') is spending, plus interest payments on the debt, minus tax revenues. Therefore, if Gt is government spending and Tt is tax revenue, then Primary deficit = Gt ? Tt If Dt ? 1 is last year's debt, and r is the interest rate, then Total deficit = Gt + rDt ? 1 ? Tt Finally, this year's debt can be calculated from last year's debt and this year's total deficit: Dt = (1 + r) Dt ? 1 + Gt ? Tt Economic trends can influence the growth or shrinkage of fiscal deficits in several ways. Increased levels of economic activity generally lead to higher tax revenues, while government expenditures often increase during economic downturns because of higher outlays for social insurance programs such as unemployment benefits. Changes in tax rates, tax enforcement policies, levels of social benefits, and other government policy decisions can also have major effects on public debt. For some countries, such as Norway, Russia, and members of the Organization of Petroleum Exporting Countries (OPEC), oil and gas receipts play a major role in public finances.
Inflation reduces the real value of accumulated debt. If investors anticipate future inflation, however, they will demand higher interest rates on government debt, making public borrowing more expensive. Structural deficits, cyclical deficits, and the fiscal gap A government deficit can be thought of as consisting of two elements, structural and cyclical. At the lowest point in the business cycle, there is a high level of unemployment. This means that tax revenues are low and expenditure (e.g. on social security) high. Conversely, at the peak of the cycle, unemployment is low, increasing tax revenue and decreasing social security spending. The additional borrowing required at the low point of the cycle is the cyclical deficit. By definition, the cyclical deficit will be entirely repaid by a cyclical surplus at the peak of the cycle. The structural deficit is the deficit that remains across the business cycle, because the general level of government spending is too high for prevailing tax levels. The observed total budget deficit is equal to the sum of the structural deficit with the cyclical deficit or surplus. Some economists have criticized the distinction between cyclical and structural deficits, contending that the business cycle is too difficult to measure to make cyclical analysis worthwhile. The fiscal gap, a measure proposed by economists Alan Auerbach and Lawrence Kotlikoff, measures the difference between government spending and revenues over the very long term, typically as a percentage of Gross Domestic Product. The fiscal gap can be interpreted as the percentage increase in revenues or reduction of expenditures necessary to balance spending and revenues in the long run. For example, a fiscal gap of 5% could be eliminated by an immediate and permanent 5% increase in taxes or cut in spending or some combination of both. It includes not only the structural deficit at a given point in time, but also the difference between promised future government commitments, such as health and retirement spending, and planned future tax revenues. Since the elderly population is growing much faster than the young population in many countries, many economists argue that these countries have important fiscal gaps, beyond what can be seen from their deficits alone. Fiscal Deficit is the excess of government's expenditure over its receipts in an accounting year. More simply, it equals the amount of borrowings made by the government in a year. Revenue Deficit, on the other hand, is the excess of revenue expenditure over revenue receipts. Primary Deficit is measured by removing interest payments from fiscal deficit. Deficits are a feature of any economy and more so of a developing economy due to the compulsions of investing for future growth. However, if one were to categorise the Indian government's expenditure into various heads, there emerges a stark reality. A large portion of the Indian government's receipts goes towards unproductive areas like interest payments (28%) and subsidies (11%). And this has been one of the foremost reasons for India's slow rate of growth in the past.
Different types of budget deficits: Early Budget Deficit: This prevailed prior to the invention of bonds. At that time, such deficits could only be funded with loans taken from either foreign nations or private financiers. The Rothschild dynasty ruling during the late 18th and early 19th century is a prominent historical example of such budget deficits. However, with passing time, these deficits or loans gained popularity in the hands of private investors, who started to accrue sufficient capital to meet their expenses at a time when the government became incapable of printing paper currencies, owing to subsequent inflation. A permanent loan or deficit is associated with sufficient risk factors for the lenders. At a later stage, attempts were made on governmental levels to do marketing of such deficits or debts by issuance of bonds, payable to the bondholders or bearers, instead of the actual buyers. This indicates that such debts are saleable, provided a person lends it to the other through state money. This simultaneously brings about a reduction in overall rates of interest as well as the risks associated with the entire process. The American Treasury bill bonds and the British Consols are the most popular and best instances of Early Budget Deficits or bonds. Cyclical Budget Deficits: At the basic level of the commercial cycle, the rate of unemployment is pretty high. On the contrary, unemployment is low at the pinnacles of the commercial cycle. This enhances tax revenue and leads to a fall in the expenditure associated with social security. Cyclic Deficit refers to the urgency to borrow money at the lowest point of the commercial cycle, which is paid back completely by a cyclic surplus existing at the highest levels of the business cycle. Structural Budget Deficits: This refers to the deficit existing across the commercial cycle. Such budget deficit prevails when the general government expenses exceed the existing levels of tax. Fiscal Responsibility and Budget Management Bill in 2000. The Bill mandates the Government to reduce its fiscal and revenue deficits over the next 5 years to specified sustainable levels What is the FRBM Act? The FRBM Act was enacted by Parliament in 2003 to bring in fiscal discipline. It received the President’s assent in August the same year. The United Progressive Alliance (UPA) government had notified the FRBM Rules in July 2004. As Parliament is the supreme legislative body, these will bind the present finance minister P Chidambaram, and also future finance ministers and governments. How will it help in redeeming the fiscal situation? The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the Union government to stick to the deficit targets. As per the target, revenue deficit, which is revenue expenditure minus revenue receipts, have to be reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the revenue deficit by 0.5% of the GDP.
The fiscal deficit is required to be reduced to 3% of the GDP by 2008-09.It would mean reduction of fiscal deficit by 0.3 % of GDP every year. Do economies need a fiscal deficit? Many economists, including Lord Keynes, had advocated the need for small fiscal deficits to boost an economy, especially in times of crises. What it means is that government should raise public investment by investing borrowed funds. This exercise is also called pumppriming. The basic purpose of the whole exercise is to accelerate the growth of an economy by public intervention. Hence, there is nothing fundamentally wrong with a fiscal deficit, provided the cost of intervention does not exceed the emanating benefits. The darker side of the story is that the borrowed funds, which always remain on tap, have to be repayed. And pending repayment, these loans have to be serviced. Ideally, the yield on investment on borrowed funds must be higher than the cost of borrowing. For example, if the government borrows Rs 100 at 10%, it must earn more than 10% on investment of Rs 100. In that situation, fiscal deficit will not pose any problem. However, the government spends money on all kinds of projects, including social sector schemes, where it is impossible to calculate the rate of return at least in monetary terms. So, one will never know whether the borrowed funds are being invested wisely. Do economies need a fiscal deficit? Many economists, including Lord Keynes, had advocated the need for small fiscal deficits to boost an economy, especially in times of crises. What it means is that government should raise public investment by investing borrowed funds. This exercise is also called pumppriming. The basic purpose of the whole exercise is to accelerate the growth of an economy by public intervention. Hence, there is nothing fundamentally wrong with a fiscal deficit, provided the cost of intervention does not exceed the emanating benefits. The darker side of the story is that the borrowed funds, which always remain on tap, have to be repayed. And pending repayment, these loans have to be serviced. Ideally, the yield on investment on borrowed funds must be higher than the cost of borrowing. For example, if the government borrows Rs 100 at 10%, it must earn more than 10% on investment of Rs 100. In that situation, fiscal deficit will not pose any problem. However, the government spends money on all kinds of projects, including social sector schemes, where it is impossible to calculate the rate of return at least in monetary terms. So, one will never know whether the borrowed funds are being invested wisely. The quantum of today’s fiscal package, given its direct impact on the Budget, is limited to Rs 32,000 crore — just 0.65 per cent of India’s GDP.
doc_390412994.docx
This is document describes about report on economics.
A budget deficit occurs when an entity (often a government) plans to spend more money than it takes in. The opposite of a budget deficit is a budget surplus. Debt is essentially an accumulated flow of deficits. In other words, a deficit is a flow and debt is a stock. An accumulated deficit over several years (or centuries) is referred to as the government debt. Government debt is usually financed by borrowing, although if a government's debt is denominated in its own currency it can print new currency to pay debts. Monetizing debts, however, can cause rapid inflation if done on a large scale. Governments can also sell assets to pay off debt. Most governments finance their debts by issuing long-term government bonds or shorter term notes and bills. Many governments use auctions to sell government bonds. Governments usually must pay interest on what they have borrowed. Governments reduce debt when their revenues exceed their current expenditures and interest costs. Otherwise, government debt increases, requiring the issue of new government bonds or other means of financing debt, such as asset sales. According to Keynesian economic theories, running a fiscal deficit and increasing government debt can stimulate economic activity when a country's output (GDP) is below its potential output. When an economy is running near or at its potential level of output, fiscal deficits can cause inflation.
Primary deficit, total deficit, and debt The government's deficit can be measured with or without including the interest it pays on its debt. The primary deficit is defined as the difference between current government spending and total current revenue from all types of taxes. The total deficit (which is often just called the 'deficit') is spending, plus interest payments on the debt, minus tax revenues. Therefore, if Gt is government spending and Tt is tax revenue, then Primary deficit = Gt ? Tt If Dt ? 1 is last year's debt, and r is the interest rate, then Total deficit = Gt + rDt ? 1 ? Tt Finally, this year's debt can be calculated from last year's debt and this year's total deficit: Dt = (1 + r) Dt ? 1 + Gt ? Tt Economic trends can influence the growth or shrinkage of fiscal deficits in several ways. Increased levels of economic activity generally lead to higher tax revenues, while government expenditures often increase during economic downturns because of higher outlays for social insurance programs such as unemployment benefits. Changes in tax rates, tax enforcement policies, levels of social benefits, and other government policy decisions can also have major effects on public debt. For some countries, such as Norway, Russia, and members of the Organization of Petroleum Exporting Countries (OPEC), oil and gas receipts play a major role in public finances.
Inflation reduces the real value of accumulated debt. If investors anticipate future inflation, however, they will demand higher interest rates on government debt, making public borrowing more expensive. Structural deficits, cyclical deficits, and the fiscal gap A government deficit can be thought of as consisting of two elements, structural and cyclical. At the lowest point in the business cycle, there is a high level of unemployment. This means that tax revenues are low and expenditure (e.g. on social security) high. Conversely, at the peak of the cycle, unemployment is low, increasing tax revenue and decreasing social security spending. The additional borrowing required at the low point of the cycle is the cyclical deficit. By definition, the cyclical deficit will be entirely repaid by a cyclical surplus at the peak of the cycle. The structural deficit is the deficit that remains across the business cycle, because the general level of government spending is too high for prevailing tax levels. The observed total budget deficit is equal to the sum of the structural deficit with the cyclical deficit or surplus. Some economists have criticized the distinction between cyclical and structural deficits, contending that the business cycle is too difficult to measure to make cyclical analysis worthwhile. The fiscal gap, a measure proposed by economists Alan Auerbach and Lawrence Kotlikoff, measures the difference between government spending and revenues over the very long term, typically as a percentage of Gross Domestic Product. The fiscal gap can be interpreted as the percentage increase in revenues or reduction of expenditures necessary to balance spending and revenues in the long run. For example, a fiscal gap of 5% could be eliminated by an immediate and permanent 5% increase in taxes or cut in spending or some combination of both. It includes not only the structural deficit at a given point in time, but also the difference between promised future government commitments, such as health and retirement spending, and planned future tax revenues. Since the elderly population is growing much faster than the young population in many countries, many economists argue that these countries have important fiscal gaps, beyond what can be seen from their deficits alone. Fiscal Deficit is the excess of government's expenditure over its receipts in an accounting year. More simply, it equals the amount of borrowings made by the government in a year. Revenue Deficit, on the other hand, is the excess of revenue expenditure over revenue receipts. Primary Deficit is measured by removing interest payments from fiscal deficit. Deficits are a feature of any economy and more so of a developing economy due to the compulsions of investing for future growth. However, if one were to categorise the Indian government's expenditure into various heads, there emerges a stark reality. A large portion of the Indian government's receipts goes towards unproductive areas like interest payments (28%) and subsidies (11%). And this has been one of the foremost reasons for India's slow rate of growth in the past.
Different types of budget deficits: Early Budget Deficit: This prevailed prior to the invention of bonds. At that time, such deficits could only be funded with loans taken from either foreign nations or private financiers. The Rothschild dynasty ruling during the late 18th and early 19th century is a prominent historical example of such budget deficits. However, with passing time, these deficits or loans gained popularity in the hands of private investors, who started to accrue sufficient capital to meet their expenses at a time when the government became incapable of printing paper currencies, owing to subsequent inflation. A permanent loan or deficit is associated with sufficient risk factors for the lenders. At a later stage, attempts were made on governmental levels to do marketing of such deficits or debts by issuance of bonds, payable to the bondholders or bearers, instead of the actual buyers. This indicates that such debts are saleable, provided a person lends it to the other through state money. This simultaneously brings about a reduction in overall rates of interest as well as the risks associated with the entire process. The American Treasury bill bonds and the British Consols are the most popular and best instances of Early Budget Deficits or bonds. Cyclical Budget Deficits: At the basic level of the commercial cycle, the rate of unemployment is pretty high. On the contrary, unemployment is low at the pinnacles of the commercial cycle. This enhances tax revenue and leads to a fall in the expenditure associated with social security. Cyclic Deficit refers to the urgency to borrow money at the lowest point of the commercial cycle, which is paid back completely by a cyclic surplus existing at the highest levels of the business cycle. Structural Budget Deficits: This refers to the deficit existing across the commercial cycle. Such budget deficit prevails when the general government expenses exceed the existing levels of tax. Fiscal Responsibility and Budget Management Bill in 2000. The Bill mandates the Government to reduce its fiscal and revenue deficits over the next 5 years to specified sustainable levels What is the FRBM Act? The FRBM Act was enacted by Parliament in 2003 to bring in fiscal discipline. It received the President’s assent in August the same year. The United Progressive Alliance (UPA) government had notified the FRBM Rules in July 2004. As Parliament is the supreme legislative body, these will bind the present finance minister P Chidambaram, and also future finance ministers and governments. How will it help in redeeming the fiscal situation? The FRBM Rules impose limits on fiscal and revenue deficit. Hence, it will be the duty of the Union government to stick to the deficit targets. As per the target, revenue deficit, which is revenue expenditure minus revenue receipts, have to be reduced to nil in five years beginning 2004-05. Each year, the government is required to reduce the revenue deficit by 0.5% of the GDP.
The fiscal deficit is required to be reduced to 3% of the GDP by 2008-09.It would mean reduction of fiscal deficit by 0.3 % of GDP every year. Do economies need a fiscal deficit? Many economists, including Lord Keynes, had advocated the need for small fiscal deficits to boost an economy, especially in times of crises. What it means is that government should raise public investment by investing borrowed funds. This exercise is also called pumppriming. The basic purpose of the whole exercise is to accelerate the growth of an economy by public intervention. Hence, there is nothing fundamentally wrong with a fiscal deficit, provided the cost of intervention does not exceed the emanating benefits. The darker side of the story is that the borrowed funds, which always remain on tap, have to be repayed. And pending repayment, these loans have to be serviced. Ideally, the yield on investment on borrowed funds must be higher than the cost of borrowing. For example, if the government borrows Rs 100 at 10%, it must earn more than 10% on investment of Rs 100. In that situation, fiscal deficit will not pose any problem. However, the government spends money on all kinds of projects, including social sector schemes, where it is impossible to calculate the rate of return at least in monetary terms. So, one will never know whether the borrowed funds are being invested wisely. Do economies need a fiscal deficit? Many economists, including Lord Keynes, had advocated the need for small fiscal deficits to boost an economy, especially in times of crises. What it means is that government should raise public investment by investing borrowed funds. This exercise is also called pumppriming. The basic purpose of the whole exercise is to accelerate the growth of an economy by public intervention. Hence, there is nothing fundamentally wrong with a fiscal deficit, provided the cost of intervention does not exceed the emanating benefits. The darker side of the story is that the borrowed funds, which always remain on tap, have to be repayed. And pending repayment, these loans have to be serviced. Ideally, the yield on investment on borrowed funds must be higher than the cost of borrowing. For example, if the government borrows Rs 100 at 10%, it must earn more than 10% on investment of Rs 100. In that situation, fiscal deficit will not pose any problem. However, the government spends money on all kinds of projects, including social sector schemes, where it is impossible to calculate the rate of return at least in monetary terms. So, one will never know whether the borrowed funds are being invested wisely. The quantum of today’s fiscal package, given its direct impact on the Budget, is limited to Rs 32,000 crore — just 0.65 per cent of India’s GDP.
doc_390412994.docx