Effective Revenue Deficit

Effective revenue deficit refers to the difference between the revenue deficit and grants for the creation of capital assets. Here, revenue deficit is the excess of revenue expenditure over revenue receipts, and grants for creation of capital assets refer to the capital receipts of the government.

Explanation

Revenue deficit occurs when the government’s total revenue receipts are less than its total revenue expenditure. In other words, the government is spending more money on its day-to-day operations than it is earning from taxes, fees, and other sources. This indicates a shortfall in the government’s revenues, which may lead to borrowing and an increase in public debt.

On the other hand, grants for creation of capital assets refer to the capital receipts of the government that are used for creating long-term assets such as infrastructure, buildings, and equipment. These grants are not meant for meeting the day-to-day expenses of the government.

The effective revenue deficit, therefore, measures the extent to which the government’s revenue deficit is financed by borrowing or grants meant for creating capital assets. If the effective revenue deficit is high, it indicates that the government may be borrowing heavily to meet its day-to-day expenses, which is not a sustainable fiscal practice.

Conclusion

In conclusion, the effective revenue deficit is an important indicator of the government’s fiscal health. A high effective revenue deficit indicates that the government is spending more on its day-to-day operations than it is earning from taxes, fees, and other sources. This may lead to borrowing and an increase in public debt, which can have long-term negative consequences for the economy.

It's the definition of effective revenue deficit.