Fiscal deficit refers to the difference between the government's total revenue and its total expenditure in a fiscal year. It represents the amount of money the government needs to borrow to meet its expenditure requirements when its spending exceeds its revenue.
In simpler terms, when a government spends more money than it earns through taxes, fees, and other sources of revenue, it incurs a fiscal deficit. The fiscal deficit is typically financed through borrowing, such as issuing government bonds or borrowing from domestic or foreign sources.
Fiscal deficit is an essential indicator of a government's fiscal health and economic management. A high fiscal deficit can indicate fiscal imbalance and may lead to various economic challenges, including higher government debt levels, increased borrowing costs, inflationary pressures, and potential risks to financial stability.
Governments use fiscal deficit as a policy tool to stimulate economic growth, especially during times of recession or economic downturns. By increasing government spending or reducing taxes, policymakers aim to boost aggregate demand and stimulate economic activity. However, sustained high fiscal deficits without corresponding economic growth or revenue generation can have adverse consequences on a country's economy in the long run.
Fiscal deficit is often expressed as a percentage of gross domestic product (GDP) to provide context and compare across different economies. A lower fiscal deficit as a percentage of GDP is generally considered more sustainable and conducive to economic stability and growth.
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