Deficit Financing

The use of deficit financing to maintain total spending or effective demand was an important discovery of the economic depression of 1930. Today it is a major instrument in the bands of government to ensure high levels of economic activity. The definition of deficit financing is likely to vary with the purpose for which such a definition is needed.

In one sense by deficit financing we mean the excess of government expenditure over its normal receipts raised by taxes, fees, and other sources. In this definition such expenditure whether obtained through borrowing or from the banking system measures the budget deficit.Deficit financing is said to have been used whenever government expenditure exceeds its receipts.

In under-developed countries deficit financing may be in two forms:

a) Difference between overall revenue receipts and expenditure
b) Deficit financing may be equal to borrowing from the banking system of the country.