Fiscal Deficit occurs when:

The correct answer is Option (1) → Government Expenditure exceeds Government Revenue (Excluding Borrowings)

The fiscal deficit is the amount by which the government’s total expenditure exceeds its total receipts other than borrowings:

• Fiscal deficit = Total expenditure − (Revenue receipts + Non-debt capital receipts)

Borrowings are left out because they are what fills the gap: the fiscal deficit shows how much the government has to borrow in the year.