Fiscal Deficit: How it hits YOUR budget

Governments often set fiscal deficit “targets” as a percentage of the GDP to ensure a balance between necessary spending and financial discipline. For

What is fiscal deficit, and why is it draining your wallet?
Imagine running your household with an income of Rs 50,000, but your monthly expenses — rent, groceries, and that unexpected medical bill — shoot up to Rs 60,000. The Rs 10,000 gap means you need to borrow money to stay afloat.

Now, think of the government as a massive household. It earns money through taxes and other sources but often spends more than it earns on things like infrastructure, subsidies, and welfare schemes. The shortfall is called the fiscal deficit, and the government has to borrow money to bridge this gap — either by taking loans from banks, issuing bonds to the public, or borrowing from international markets.

But here’s the kicker: when the government borrows more, it sets off a chain reaction that could directly impact your wallet.

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How does fiscal deficit hit your finances?

Higher interest rates = Costlier loans and EMIs
When the government borrows heavily, it competes with businesses and individuals for funds from banks or other financial institutions. This demand for money pushes up interest rates. As a result, your home loan, car loan, or personal loan EMIs become more expensive. That dream home? It just got pricier.

Higher inflation = Costlier groceries and services
If the government funds the fiscal deficit by printing more money, it increases the money supply in the economy. The result? Prices of essentials like food, fuel, and services go up. Your monthly grocery bill starts pinching harder.

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Higher taxes = A bigger dent in your income
To manage a high fiscal deficit, the government might introduce new taxes or raise existing ones. That could mean higher income tax deductions from your salary or increased GST on items you buy. Subsidies on fuel or food may also be reduced, forcing you to pay more for everyday essentials.

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Is fiscal deficit always bad? Not if it’s spent wisely.
Borrowing isn’t always bad. Just like taking a loan to buy a house or fund your education is an investment in your future, a fiscal deficit can be beneficial if the government uses the money to build highways, invest in renewable energy, or improve healthcare and education. These projects create jobs, stimulate the economy, and improve quality of life for everyone.

But here’s the downside: if the government borrows recklessly to fund non-productive expenditures or cover inefficient subsidies, it’s like maxing out a credit card to pay for luxuries. Over time, the mounting debt could lead to a debt spiral, where the government has to borrow even more just to pay interest on existing loans. This could weaken the economy, scare off investors, and leave future generations to deal with crushing debt burdens and slower growth.

Fiscal deficit: The economy’s ‘fitness tracker’
Think of the fiscal deficit as a fitness tracker for the economy. It shows whether the government is spending and borrowing within healthy limits or overindulging in debt. A lower fiscal deficit reflects fiscal discipline, which keeps inflation and interest rates in check, leaving more money in your pocket.

Governments often set fiscal deficit “targets” as a percentage of the GDP to ensure a balance between necessary spending and financial discipline. For example, keeping the deficit under a certain percentage shows that the government is prioritising sustainable economic growth while avoiding excessive borrowing.

By understanding how fiscal deficit impacts your wallet — from higher EMIs to rising grocery bills — you can better appreciate its importance the next time it’s mentioned in the Budget. After all, it’s not just about the government’s books; it’s about yours too.