What is a fiscal deficit
A fiscal deficit is the gap that appears when a government spends more in a year than it collects in revenue.
The government covers this gap by borrowing, usually by selling bonds and bills at a bond auction, by borrowing from banks or by taking loans from abroad. Each year's deficit adds to the stock of public debt.
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Formal definition
In formal terms, the overall fiscal deficit is total expenditure (current plus development spending, including interest) minus total revenue (tax plus non-tax revenue) and grants. It is usually reported in local currency and as a share of GDP. The share of GDP is the figure most analysts compare across years and countries.
Edge cases an experienced reader should know:
- Primary deficit. This is the deficit with interest payments left out. A government can run a primary surplus and still have an overall deficit if its interest bill is large.
- Federal vs consolidated. Pakistan reports federal figures and consolidated figures that also include the provinces. The two can differ a lot.
- Below-the-line items. Privatisation receipts are often counted as financing rather than revenue. Treatment varies by country and by reporting standard.
- Off-budget liabilities. Losses in state-owned enterprises or arrears such as energy-sector circular debt may not appear in the headline deficit, even though they become public debt later.
- Cyclical vs structural. Part of a deficit comes from the business cycle, because tax revenue falls in a slowdown. The structural part remains even when the economy is at normal capacity.
Worked example (hypothetical)
Take an imaginary country. Its government collects taxes and fees during the year. It spends more than that amount on salaries, subsidies, development projects and interest on old loans. The amount by which spending exceeds revenue is the fiscal deficit.
To finance the gap, the government issues new bonds. Next year it must pay interest on those bonds, so interest spending rises. If revenue does not rise as well, the next deficit tends to be larger. This feedback is why markets watch the debt-to-GDP ratio together with the deficit.
Where you see the term
- Pakistan fiscal deficit reports. The federal budget and the Ministry of Finance's fiscal operations releases state the deficit in rupees and as a share of GDP. IMF programme reviews also set targets for it.
- News and economic calendars. Budget announcements and deficit numbers appear in fundamental analysis coverage of currencies and bonds.
- Bond markets. Larger deficits can mean more government bond supply. They can also widen credit spreads and change Eurobond yields.
A deficit figure on its own does not tell you how a currency or index will move. Leveraged CFD and forex trading around economic news can lose money fast.
Fiscal deficit vs trade deficit
| Fiscal deficit | Trade deficit | |
|---|---|---|
| Whose balance | Government budget | Whole country's trade in goods (and sometimes services) |
| Gap between | Spending and revenue | Imports and exports |
| Financed by | Government borrowing | Foreign inflows recorded in the capital and financial account |
| Main report | Budget and fiscal operations | Balance of payments |
When a country runs both deficits at the same time, they are called "twin deficits."
Related terms
Frequent questions
What is fiscal deficit in simple words?
It is the amount by which a government's yearly spending is larger than its revenue. The government borrows to cover the gap.
Is a fiscal deficit always bad?
Not always. A deficit can fund investment or support the economy during a slowdown. Large deficits that continue year after year raise debt and interest costs.
What is the difference between fiscal deficit and primary deficit?
The primary deficit leaves out interest payments on existing debt. The overall fiscal deficit includes them.
Is fiscal deficit the same as public debt?
No. The deficit is the gap for a single year. Public debt is the total amount owed, built up from past deficits.