Deficit Financing

Defination
Deficit Financing

Deficit budget means that Govt. expenditure is more than its income from taxes and fee etc. Resources for deficit budget are met by borrowing, which is called Deficit Financing. In Pakistan deficit financing is needed because development programs require huge finance whereas domestic savings and income from taxes are not sufficient enough for this purpose. Increasing savings habits, population control, elimination of corruption, decrease in non-productive expenditure and increase in agricultural and industrial products and remove budget deficit.

Purpose of deficit financing

Governments use deficit financing for serveral purposes.
1.One of the most common is to increase the money supply and the number of bonds it has in the economic system, thus influencing the economic activity of investors.
2Governments may have a choice between using debt and raising taxes. Issuing more bonds is usually more politically attractive than raising taxes. Govt.
3.uses borrowed money for increase in social and economic infrastructure such as schools, hospitals, power projects, dams, canals and a host of other development programs,
4.which helps in the improvement and productivity of various sectors of economy.
5.This expenditure of Govt. increases money supply,
6.which increases price level in the economy. Increases in prices, increases profit margins of industrialists,
7.in order to gain profit further accelerate their investment. New factories are established and capital formation increases.
8.Govt. expenditure and private capital formation creates more jobs opportunities in the economy.
9.Increase in employment increases demand for goods and services
10.it fosters saving as well, which again is utilized for further investment. Thus cycle of progress and prosperity keeps on moving ahead.

Disadvantages

1.There is always a time lag between Govt. investment and the output from the projects.
2.Increase in supply of money creates inflation, by which poor people are badly affected.
3.Their purchasing power reduces to a greater extent whereas profit margin of businessmen increases.
4.Society is divided between haves and have-not. Increase in prices of domestic goods causes imports of cheaps goods whereas domestically produced goods high prices reduces the export earnings,
5.which results in the adverse balance of payments position.
6.Cost of production of industrial goods increases with the increase in prices of raw material etc., therefore foreign investment in the country becomes less attractive.