What is Deficit Financing?

Deficit financing is a method of meeting government deficits through the creation of new money. The deficit is the gap caused by the excess of government expenditure over its receipts. The expenditure includes disbursement on revenue as well as on capital account. Thus, Simply It defines as the excess of expenditure over and above the total income of the government.

Meaning and Definition

The National Planning Commission of India has defined deficit financing in the following way. The term ‘deficit financing’ is used to denote the direct addition to gross national expenditure through budget deficits, whether the deficits are on revenue or on capital account.

Deficit-FinancingObjectives of Deficit Financing

  • It is used as the simple and effective fiscal device to meet the financial requirements of the government during emergencies such as war.
  • Keynes popularized It as an effective fiscal instrument to control the economic fluctuations and to raise the level of the employment and output.
  • It is considered as a method to mobilize resources for planned economic development.
  • Another objective of deficit financing is to raise the level of effective demand and thereby to stimulate private spending in a depression economy.
  • J.M. Keynes advocated It is a instrument to mobilize surplus labour and other idle and unutilized resources during depression, for achieving economic development.
  • In developing economies the main objective of deficit financing is to remove the vital issue such as unemployment, poverty and income inequality.

Disadvantages

  • It may lead to inflation. Due to deficit financing money supply increases & the purchasing power of the people also increase which increases the aggregate demand and the prices also increases.
  • It also leads to inflation and inflation affects the habit of voluntary saving adversely. Infect it is not possible for the people to maintain the previous rate of saving in the state of rising prices.
  • It effects investment adversely when there is inflation in the economy trade unions make demand for higher wages for that they go for strikes and lock outs which decreases the efficiency of Labour and creates uncertainty in the business which a decreases the level of investment of the country.
  • Problem of balance of payment and Increase in the cost of production.