InvestorQ : what do you mean by deficit financing? explain it's importants.
sandeep mulewa made post

what do you mean by deficit financing? explain it's importants.

priya Shah answered.
2 years ago
Deficit financing stands for a practice where the government of a country spends more amount for the welfare, development, and other expenses of the nation than the actual revenue it has collected during the year and to cover up the excess money spent it borrows the differential amount or raise funds through various financing modes. Sometimes where the capital markets of a nation are underdeveloped, deficit financing may place the government in debt to foreign creditors.

There are several reasons due to which deficit financing results such as poor management by the government, its inefficiency resulting in widespread tax evasion, or wasteful spending on an unplanned countercyclical policy.

As far as the importance of deficit financing is concerned:
  • It creates an economic surplus during the process of development.
  • The inflationary effect gets neutralized.
  • It plays an important role in meeting the liquidity requirements of the growing economies.
While deficit financing could appear to be beneficial from an outer perspective, its end result is inflation and economic instability.