Deficit Financing- Objectives, Types, Advantages

Deficit financing is the process of borrowing money from the public or central bank to settle the budgetary deficit between government spending and income. The objective of deficit financing is to balance the government's total spending and revenue.

Objectives of Deficit Financing

• To encourage the ideal resources and shift resources from useless sectors to productive sectors with the main goal of increasing national income, leading to higher economic growth.
• To lift the economy out of collapse so that jobs, income, and capital grow.
• To upgrade the country's infrastructure so that the citizens may be sure that the money they pay in tax is being utilized wisely.
• To pay expenses related to defense during war.

Types of Deficit Financing

External Borrowing Method:

Money Printing:

Internal Borrowing Method (Borrowing from RBI):

Impact of Deficit Financing

• An increase in inflation is a result of an increased amount of money within the economy.
• Higher inflation leads to a decrease in the average spending level as the cost of goods and services increases, affecting people's buying power.
• The increased money supply tends to create more chances for the rich, increasing income gaps within the economy.
• It causes inflation, negatively affecting the tendency for private saving. Sustaining previous saving rates becomes impractical for people amid rising prices.
• Deficit funding negatively affects investment. In an inflationary situation, trade groups and workers often seek higher pay, leading to increased production costs. This, in turn, stops buyers from acting in economic activities.

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Advantages of Deficit Financing

Disadvantages of Deficit Financing