Question

What is Fiscal Gap? Explain in words and write down the formula.

Answer 1

Fiscal gap is an method to estimate the future deficits by projecting how much govt's spending and debt obligations have surpassed the total revenue over a specified period of time. A fiscal gap could invite many problems to the national economy. With the rising debt by the government, there occurs the possibility of fiscal crisis in the country. The total revenue collected in a period of time also fails to help the government which force them to take loans from various sources with higher interests. Higher government debts increases the burden on public by increasing the tax rates which reduces the investment in the market and reduced productivity. National savings of a country decrease when the fiscal gap is big making government unable to invest in the public welfare programmes and it reduces the ability of government to respond to domestic and international events and crises.

The formula to calculate fiscal gap is as follows -

G=C+D-B-A*

Here G is Fiscal gap, C is the present value of government purchase, D refers to official net liabilities, B defines the present value of net tax payments of current generations and A* is the net tax burden that would face future generations if there were no generational imbalance.