SSC Selection Post 2025 PYQ — Question 6

Correct Answer: Surplus in the balance of payments

Explanation

A fiscal deficit occurs when a government's total expenditure exceeds its total revenue (excluding borrowings). High government spending on welfare schemes and a reduction in tax revenue are both primary factors that increase the expenditure-to-revenue gap, thus leading to a fiscal deficit. While an increase in public borrowing is often the result of managing a fiscal deficit to cover the gap, a surplus in the balance of payments is a separate external trade indicator and is not a cause for the government’s internal fiscal deficit.

Key Points

• A fiscal deficit is a direct reflection of a government's budgetary imbalance where expenses are greater than income.
• High government expenditure, such as funding large-scale social welfare or infrastructure projects, naturally pushes the fiscal deficit higher if revenue does not keep pace.
• A decline in tax revenue, perhaps due to economic slowdown or tax evasion, reduces the funds available to the government, thereby widening the deficit.
• A surplus in the balance of payments relates to a country's total transactions with the rest of the world and does not inherently create a domestic fiscal deficit.

Additional Facts

• Public borrowing is the primary method used by governments to finance their fiscal deficit, rather than being an original cause of the deficit itself.
• Fiscal consolidation is the policy framework governments use to reduce their fiscal deficit over time through better tax administration and expenditure management.

Important Questions

Question: What is the difference between fiscal deficit and revenue deficit?

Answer: A fiscal deficit encompasses the total gap between income and expenditure (including capital expenditure), whereas a revenue deficit only concerns the gap in regular government receipts and operating expenses.

Question: Can a country have a fiscal deficit while also having a positive balance of trade?

Answer: Yes, these are separate economic metrics; a country can have a strong export performance (positive balance of trade) while simultaneously facing a domestic fiscal deficit due to high internal spending.