The situation where a country runs both a fiscal deficit (government spending exceeds receipts) and a current account deficit (external payments exceed receipts) at the same time, the two being seen as linked.
- The "twin deficit hypothesis" holds that a large fiscal deficit can spill into the external sector by raising domestic demand and imports, widening the current account deficit.
- The two deficits are distinct in origin: one is an internal government-budget gap, the other an external balance-of-payments gap; see concept fiscal deficit and concept current account deficit.
- A simultaneous widening of both raises macroeconomic vulnerability, pressuring the rupee, inflation, and borrowing costs.
- India watches the twin-deficit risk especially when global oil prices rise (widening the CAD) alongside higher government spending.
- It is a recurring theme in the Economic Survey's macro-stability discussion; verify the latest figures.
The definition (fiscal plus current account deficit together), the linkage idea, and the vulnerability it signals are testable macro-stability facts.
The twin deficit is the fiscal deficit plus the current account deficit, not the revenue plus fiscal deficit; the two are an internal and an external gap, conceptually different but seen as connected.
Fiscal deficit and current account deficit occurring together; a large budget gap can widen the external gap.