Fiscal deficit may be defined as a position where total expenditure of the government is more than its sum total of revenue receipts and non-debt capital receipts. Thus,
Fiscal deficit = Total expenditure – Total revenue receipts – Non-debt capital receipts
Fiscal deficit within a limit does not create any problem. But, if fiscal deficit is high, it would create a large number of problems. High fiscal deficit encourages wasteful and unnecessary expenditure on the part of the government. Further, a high fiscal deficit leads to financial instability because high fiscal deficit encourages borrowings on the part of the government. This creates a large burden of interest payment and repayment of loans in the future. A country has to face the problem of debt-trap. Further, a large fiscal deficit may be inflationary.
