Which of the following statements is not true about fiscal deficit?

The correct answer is Option (3) → Fiscal deficit is deflationary.

The fiscal deficit is the government’s total expenditure minus its total receipts other than borrowing. It has to be met by borrowing.

• Option (1) Fiscal deficit is the difference between the government’s total expenditure and its receipts excluding borrowing. — True. This is its definition: total expenditure minus revenue receipts and the capital receipts that do not create debt.

• Option (2) Fiscal deficit is also known as borrowings. — True. The deficit is financed by borrowing at home, from the RBI and from abroad. So it shows the total borrowing needs of the government.

• Option (3) Fiscal deficit is deflationary. — False. A deficit means the government spends more or taxes less, so aggregate demand rises. If firms cannot produce more at current prices, prices rise. So the usual criticism is that deficits are inflationary.

• Option (4) There can be fiscal deficit without revenue deficit. — True. The fiscal deficit also counts capital expenditure. Even when revenue receipts cover revenue expenditure, borrowing for buildings or machinery leaves a fiscal deficit.