Deficit Financing
Deficit Financing
Definition:
Deficit financing refers to the method used by the government to meet budget
deficits (when expenditure is greater than revenue) by:
- Borrowing
from the central bank
- Printing
new currency
- Borrowing
from domestic or foreign sources
Formula:
Government Expenditure – Government Revenue = Budget Deficit
Government covers this deficit through deficit financing.
Why Do Governments Use Deficit Financing?
- To
promote economic development
- For
public welfare programs
- To
finance development projects (roads, hospitals, schools)
- To
cover emergencies such as floods, wars, pandemics
Effects of Deficit Financing
Positive Effects:
- Boosts
economic activity
- Increases
employment
- Helps
in infrastructure development
Negative Effects:
- Leads
to high inflation
- Increases
public debt
- Causes
depreciation of currency
- Reduces
investor confidence
Summary for Students
- Inflation:
Continuous rise in prices.
- Causes:
Demand-pull, cost-push, imported inflation, excessive money supply,
structural issues.
- Deficit
Financing: Government meets deficit by borrowing or printing money; it
may help development but can also cause inflation.
