As we know, the main sources of government revenue are taxes, levies, prices, special assessments, rates, gifts, etc. etc. If, over a period of time, public expenditure exceeds government revenue and the deficit is covered by borrowing, it is called deficit financing or revenue generating finance. Thus, in order to have a significant impact on enlargement, the public investment program should be financed through borrowing and not through taxation. Such borrowing or loan costs are popularly called deficit financing.
Deficit financing is said to have been practiced if the state opts for one or all of the following methods:
(a) Government uses balances of past money.
(b) The government borrows from the central bank for government securities.
(c) The government makes money by printing paper currency and thus covers the revenue related expenses.
(d) Government borrowing from outside.
Deficit financing was considered a very dangerous weapon by classical economists. Modern economists, however, tend to do so and recommend using it to accelerate economic development and achieve high employment rates in the country.
Here’s how to fix this problem:
(i) Whether revenue-generating finance should be used to increase aggregate actual demand.
(ii) If it is desirable to finance a deficit in order to ensure a high level of employment, the extent to which it should be met.
(iii) What are its good and bad effects?
Deficit financing is practiced by both advanced and underdeveloped countries. Developed countries use it as a means of boosting effective demand, while LDCs use it to increase capital formation.
The scale of deficit financing for accelerated growth in lagging economies is very marked as they fall into the vicious circle of underdevelopment. They use funds for investment when the country’s resources are not sufficient to initiate take-offs. Thus, there is a need for deficit financing.
Underdeveloped countries face the following challenges:
i) Population growth rates are faster than economic development rates.
(ii) State revenues from taxes, duties, etc. are not sufficient to ensure full employment of the workforce.
(iii) very low per capita income and hence potential savings.
(iv) Foreign development loans are not without a line and are not of sufficient size.
(v) Lack of capital in the country.
vi) People lack initiative and entrepreneurship.
(vii) People are usually extravagant and save less.
(viii) the majority of the population lives in villages and is in the care of their territory.
(ix) The government cannot make people uncomfortable by raising tax rates above a certain threshold. Nor can it impose additional charges for the same reason.
(x) Tax evasion is therefore excessive.
Under the above conditions, the reader can easily imagine the situation facing the government of the backward country. However, no government wants to be a silent spectator and wants people’s living standards to rise in the shortest possible time. Efforts will be made to find money out of the blue if it is needed to spread the country’s economic development. This is where deficit financing rescues. The state is using this measure to break the economy out of depression and accelerate the country’s economic development. However, if the state can increase resources by raising tax rates, imposing additional taxes or concentrating increased savings, then it is not willing to accept the financing of deficits, as it is a very delicate measure.