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CA Foundation · Business Economics · Public Finance

Which of the following is the most likely consequence of a persistently high revenue deficit that is financed by borrowing?

A persistently high revenue deficit financed by borrowing means the government is borrowing to meet current consumption spending. This adds to liabilities and future interest burdens without creating productive assets, which weakens its fiscal position over time.

  1. AThe government creates productive assets that raise future revenue
  2. BBorrowing is used to meet current consumption, adding to liabilities without creating assetsCorrect
  3. CThe primary deficit automatically becomes a surplus
  4. DCapital expenditure rises by the same amount as the borrowing

Explanation

A revenue deficit means current expenditure exceeds current receipts, so borrowing finances day-to-day spending rather than asset creation. This increases debt and future interest burden without generating assets or income. The other options assume borrowing is used for capital formation, which is not the case here.

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