Fiscal Deficit vs Revenue Deficit
In today’s highly uncertain business environment, it is essential for organizations to plan and monitor business operations. A budget is an important part of financial planning as it lays out the company’s future income and projected expenses. Preparing a budget will provide an organization the tools it needs to operate in a financially healthy manner, and will help an organization meet all its obligations. Managing a healthy budget may prove to be a challenging task; as such, organizations frequently experience budget deficits. This article takes a closer look at two types of budget deficits, Fiscal Deficit and Revenue Deficit and highlights the differences and similarities between the two.
What is Revenue Deficit?
A revenue deficit occurs when the organization does not receive as much net revenue as they projected earlier. Net income is the difference between the income for the period and expenses for the period. A company’s net revenue may not reach the projected amount when either the income for the period is lower than projected or the expenses for the period are higher than projected. Every organization, whether a company or a government will monitor previous years’ incomes and expenses and project the income and expenses for the following year, to predict the surplus or deficit they will arrive at the year end.
Taking an example; an organization projects its revenue for the year to be $100,000, expenses to be $50,000, and expects to make a gain of $50,000. However, the organization’s actual revenue is $80,000 and expenses are $60,000, which means the actual net revenue is $20,000; the actual net revenue was $30,000 less than the projected amount and, therefore, this resulted in a revenue deficit.
What is Fiscal Deficit?
A fiscal deficit occurs when the expenses for the period are higher than the actual revenue. When the organization or government suffers a fiscal deficit, there will be no excess funds to invest in the development of the organization/country. A fiscal deficit would also mean that an organization/government will have to borrow funds to make up for the deficit which will result in higher levels of interest expenditure. A fiscal deficit can be caused by an unexpected expenditure such as a fire destroying company premises, or a natural disaster that requires the government to reconstruct housing.
Fiscal Deficit vs Revenue Deficit
A budget deficit, whether revenue deficit or fiscal deficit is not a situation that any organization or a government would like to find themselves in. A budget deficit can lead to higher levels of borrowing, higher interest payments and low reinvestment which will result in lower revenue during the following year. The article discussed two types of deficits, revenue deficits and fiscal deficits. A revenue deficit is different to a fiscal deficit in that a revenue deficit occurs when the actual net revenue is lower than the projected net revenue (since either actual expenses are higher, or actual revenues are lower than projected amounts), and a fiscal deficit occurs as a result of low revenue and higher expenses than projected, which results in the organization being unable to cover the expenses for the period.
Summary:
• A budget is an important part of financial planning as it lays out the company’s future income and projected expenses.
• A revenue deficit occurs when the organization does not receive as much net revenue as they projected earlier.
• A fiscal deficit occurs when the expenses for the period are higher than the actual revenue.