What is Deficit Financing
What is deficit financing?
The concept of deficit financing was one of the discoveries of the Depression of the thirties of this century. In recent years, deficit financing has assumed further importance, since it has come to be recognized as a major source of finance for the economic development of under-developed countries.
Meaning of deficit financing
The expression 'deficit financing' is employed to indicate the direct accumulation to gross national expenses in the course of budget deficits, whether the discrepancies are on income or on financial credit. The core of such a strategy lies, consequently, in management spending in surplus of the income it collects in the form of taxes, income of State ventures, credits from the community, fixed deposits and supports from additional resources. It is in addition also known as deficit spending. The management may cover the shortfalls whichever by running behind its collected revenues or by loaning from the banks, mostly from the Reserve Bank of the nation and consequently 'creating money'.
The term deficit financing thus refers to the use of created or newly activised money to finance public expenditure.
Thus, (a) the net fall in the Government's cash balances and (b) the net borrowing from the Central Bank during the year is together the measure of the deficit incurred by the Government during the year. The deficit is, therefore, the equivalent of the new money created for meeting it.
The purpose of deficit financing is to enable the Government to carry out a programme of expenditure beyond the limit of its current receipts from the public. In the fulfillment of this purpose, the Government would appear to be adding to the purchasing power of the community an amount equal to the newly-created money.
Deficit financing vs. Deficit budgeting
Deficit financing may be distinguished from deficit budgeting. There is said to be deficit budgeting when current expenditure of the government exceeds current revenue without taking into account any item on capital account. But when receipts on capital account like public borrowing are also included and there is still a gap between receipts and expenditure, the method of deficit financing used to cover this gap is called deficit financing. In other words, the value of deficit financing is measured in terms of the overall budget deficit on both the revenue and the capital accounts.