Deficit Financing

Deficit financing is the need of modern governments but dangerous also. Examine?

Deficit refers to the difference between expenditure and receipts.  In public finance it means the government is spending more than what it is earning. The concept was popularized by noted British economist J. M. Keynes. He advocated use of deficit financing as a mean to overcome economy from depression.

Deficit financing is a necessary evil in a welfare state as the govt. often fails to generate tax revenue which is required to take care of expenses and development needs. The basic intention behind deficit financing is to provide the necessary impetus to economic growth by artificial means. Deficit financing allows the govt. to undertake the activities which otherwise would be beyond its financial capability. Taxation, public debt, printing currency are some measures of Deficit Financing.

However Deficit Financing helps to certain extent only and beyond that it may cause havoc. Deficit Financing may lead to inflation. Due to Deficit Financing money supply increases and the purchasing power of the people which increase the aggregate demand and hence inflation.

In case of Deficit Financing income distribution becomes unequal which makes rich richer and poor poorer.

Balance of Payment: A high price level as compared to other countries will make the export more expensive and import lucrative. This will create an unfavourable balance of payment.

Increase in cost of production: Deficit Financing leads to the rise in the price level the cost of development projects also rises, this means a larger Deficit Financing is required to finance these projects.

Change in pattern of investment: If inflation reaches to a very high level in that case people instead of indulging in productive activities, start doing speculative activities.

However Deficit Financing for development and Deficit Financing for financing war should be distinguished. In the latter case there is increase in expenditure without increase in mean of production, this is certainly an undesired condition. On the other hand in case of development Deficit Financing, inflationary effects are neutralized by increased production. But the increase in output would be only after a time lag, and longer the time the projects take in maturing, the longer is the time gap between increase in demand and increase in supply.

Deficit Financing is neither good nor bad. It depends on the circumstances in which it is used and the economic policy which is followed to neutralize its adverse consequences. Govt. can always introduce schemes of saving and taxation to take away surplus money with people.

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  Posted on Monday, October 12th, 2015 at 7:18 AM under   Polity