Budget 2026: What is a fiscal deficit, its advantages, and how it is financed?

As the Union Budget 2026 for the financial year 2026–27 is set to be presented in Parliament on Sunday, 1st February 2026 at 11 AM, focus is on how the government plans to manage its spending and borrowing. The fiscal deficit indicates the gap between government expenditure and revenue, showing how much the government needs to borrow to fund infrastructure, welfare programs, and other key initiatives.

What is fiscal deficit?

A fiscal deficit occurs when a government’s total expenditure exceeds its revenue receipts, excluding borrowings, in a financial year. Simply put, it shows the gap between government income from taxes and other sources and its total spending, indicating the amount the government needs to borrow to meet its obligations. The fiscal deficit is a key indicator of a country’s financial health and budgetary discipline.

Understanding the fiscal deficit

Governments may intentionally run a fiscal deficit to fund developmental and social welfare initiatives. In a growing economy, deficit spending can finance infrastructure projects, healthcare, education, and welfare schemes. Such spending stimulates economic activity by boosting demand, creating employment, and enhancing long-term productive capacity.

When used judiciously, fiscal deficits can act as an effective tool for supporting growth, especially during economic slowdowns. However, sustained high deficits can increase public debt, raise borrowing costs, limit future spending capacity, and contribute to inflationary pressures. Maintaining a balance between fiscal support for growth and fiscal sustainability is therefore crucial.

How is fiscal deficit financed?

Governments fund fiscal deficits through multiple channels:

1. Domestic borrowing: Funds are raised by issuing government securities, bonds, and treasury bills, purchased by banks, public sector institutions, and the general public. Borrowing may also occur through the central bank.
2. External borrowing: Governments can raise money by issuing sovereign bonds internationally or borrowing from multilateral institutions like the World Bank and the International Monetary Fund (IMF).
3. Capital markets: Long-term debt instruments are used to mobilize additional funds.

Advantages of a fiscal deficit:

When managed effectively, fiscal deficits can:

1. Stimulate economic growth by financing infrastructure and development projects.
2. Encourage private investment by improving facilities and services.
3. Support welfare programs reducing poverty and inequality.
4. Boost aggregate demand, particularly during economic downturns, helping revive economic activity.