Deficit Financing
- Deficit Financing can be defined as the practice where the government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds.
Advantages of Deficit Financing
- In deficit financing surplus money of the taxpayer is lent to the government and hence it does not bother the taxpayer.
- Additional money is created by borrowing from RBI and interest payments associated with the borrowing are returned to the government.
- Increases the financial strength of the government.
- Leads to inflation which can prove to be beneficial under certain circumstances.
- Have a multiplier effect on economic development as it encourages the government to utilize unemployed and underemployed resources.
Disadvantages
- Causes inflation and a rise in prices which can prove to be a vicious cycle.
- Individuals with fixed sources of income are not benefited and this can lead to income disparity.
- Disturbs the entire investment system as most of the investment is attracted towards the quick profit-yielding industries which are not beneficial for long-term growth.
- Weaker nations, fewer employment opportunities are created due to the absence of other resources such as infrastructure, machinery, etc.
- The purchasing power of money can decrease leading to an outflow of capital from the country.