Quality of government expenditure
Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Class 12, Ch 5 "Government Budget and the Economy"
Meaning
Quality of government expenditure tells us how much public money goes to productive, asset-building uses rather than to day-to-day consumption. A key test is the ratio of revenue deficit to fiscal deficit (RD/FD). When this ratio rises, a bigger part of borrowing is paying for consumption instead of capital formation, so the quality of spending is getting worse. This matters because spending on assets supports future growth.
Example
In 2023-24, RD was 2.6% of GDP and FD was 5.6%, so RD/FD ≈ 46%. That means nearly half of all borrowing went to revenue spending. An NIPFP study (2015) found a capital expenditure multiplier of about 2.45, against about 0.99 for revenue spending and transfers. This is why quality matters.
Don't confuse with
- Size of the fiscal deficit: two budgets with the same fiscal deficit can differ in quality, depending on how much of the borrowing funds capex.
Related concepts
- Balanced budget
- Surplus budget
- Budget deficit
- Revenue deficit
- Effective revenue deficit
- Fiscal deficit
- Primary deficit
- Net interest liabilities
- Government dissaving