Definition: Fiscal deficit is the difference between total revenue expenditure and revenue collected by the government in a given financial year. It is an accounting term, sometimes also referred as fiscal slippage.
Since government borrows that extra money from the market (international or domestic) to fill the gap in collections and spending, it is also an indicator of the government borrowings in a financial year.
Fiscal deficit is also called fiscal leverage as it enhances the government's ability to spend more for growth. But more borrowings may lead to default or interest rate fluctuations causing more harm than benefit to economy.
Fiscal deficit appear in the books of account when a government do over spending. In that case, government borrow from the market and spends on different heads like social welfare schemes, reform processes or modernising military etc.
High fiscal deficit is very common in emerging or developing economy. It induces inflation in the economy but can increase GDP numbers and job opportunities.
Fiscal deficit is generally recorded in the growth economy budget. For example among developing Asian country, India in 2020-2021 budget has declared a fiscal deficit of 3.5% means - India has set a target for not exceeding it's fiscal deficit (excess spending) above 3.5% of it's GDP. This limit is important so that the government stay in it's ability to service its borrowings. Any default or further borrowings or monetization to service earlier borrowings can invite a rating downgrade by international agencies.
How much fiscal deficit a government can afford?
It includes estimation of GDP growth over the next financial year. If a government is of the view that the economy is expanding and GDP will rise to a sizable percentage and so is the tax collections, they can spend more in advance as it will be covered automatically in the next fiscal due to GDP growth. If the international rating agencies are convinced with the government view and come to the same page, they will not downgrade the country rating but give it an outperform rating.