What is fiscal slippage? How do we combat it?

economics :fiscal slippage

Answer by Alok Pandey:

For fiscal slippage, you must know what is slippage after all?

Let's say there is a trader and she wants to buy some stocks/shares. Let's say 5000 of them. The market-maker(like an intermediary because not all the buyers/sellers know each other or are accessible to each other at all times) has only 2000 with it. The only way the buyer can do this is by placing an order with the market-maker and the market-maker when gets the additional 3000, sells it to the buyer.
But in a very volatile/fluctuating market this selling price might vary. For the first 2000, let's say it's ₹10/share. For the next 3000, it's ₹11.
The difference between the price what the buyer would have expected to pay for some trade and what she actually ends up trading at is called Slippage.
So, slippage here = ₹(10*5000) – ₹[(10*2000) + (11*3000)] = -(₹3000)
Similarly there could be a case for a seller.
This is a very basic explanation but I hope you get the idea.

Now let's move on to the fiscal one.
You know government budgeting,right?
I have made a flow-chart that might clear up any doubt you have.

Budgetary Deficit = Total budget expenditure – Total Budget Receipts
Fiscal Deficit = Total budget expenditure – (Total Budget Receipts – Borrowings)

That means, to measure fiscal deficit, we don't consider money that the government obtained through borrowings (Domestic & External Borrowings in the figure).

Now, every year, the government aims to keep their deficit upto a certain level(expressed usually in % of GDP), like Mr. Jaitley did in this year's budget.
Arun Jaitley retains fiscal deficit target at 4.1%, outlines roadmap

But what if our expenditure goes beyond what we planned(say due to rise in international oil prices) or our revenues fall unexpectedly? The deficit will widen, wouldn't it.  That unexpected(but apparently visible as it approaches) widening/overshoot is called Fiscal Slippage.
The disinvestment that the government did recently is supposed to be one of the measures to avoid this slippage.
Cabinet approves divestment in ONGC, Coal India, NHPC

Solutions actually lie in the factors itself.
For example, the Centre’s net tax collections during April-May were up just 3.1 per cent over the first two months of 2013-14, as against the 20.9 per cent growth expected in the Interim Budget presented in February.

So, my suggestions?

  • Disinvestment and use the proceeds to revive economic sectors and infrastructure. This will help create some jobs.
  • The above step will bring in investments. More jobs. Money creates money, right.
  • Control the subsidy wagon, it alone costs around ₹300,000 crore annually.
  • An effective tax regime that actually doesn't let people(producers, consumers, servicemen, etc) feel squeezed every time they think of paying taxes.
  • Any and all measures that help augment the revenue and promote judicious expenditure.

What is fiscal slippage? How do we combat it?


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