As we know, the main sources of government revenue are taxes, fees, prices, special assessments, prices, gifts, etc. etc. If public spending over a certain period exceeds government revenue and deficit is met by borrowing, it is called deficit financing or income-generating funding. In order to have significant expansion effects, a public investment program should be financed through borrowing rather than taxation. This type of loan or borrowing is generally called for deficit financing.
Deficit financing is said to have been practiced if the state assumes any or all of the methods mentioned below:
a The government is based on previous cash funds.
b The central government borrows from central banks against government bonds.
c The government creates money by printing paper currency and thus meets the expenses over receipts.
d Government borrows externally.
Deficit financing was considered a very dangerous weapon by the classical economists. The modern economists are leaning against it, and recommend that they be used to accelerate economic development and achieve high employment in the country.
The problem to be solved here is:
i Whether revenue-generating funding should be adopted to increase overall effective demand.
ii If deficit financing is desirable to ensure high employment levels, to what extent should it be implemented.
iii What are its good and bad effects?
Deficits are financed by advanced as well as underdeveloped countries. The advanced countries use it as an instrument to boost efficient demand while the underdeveloped countries use it to increase the rate of capital growth.
The extent of deficit financing to accelerate economic growth in the backward economy is very bright because they are caught in a vicious circle of underdevelopment. They use funds for investment when resources in the country are insufficient to initiate startup processes. Then the need arises for financing deficits.
The underdeveloped countries face the following problems:
i Volatility of the population is faster than economic development.
ii Government revenue generated by taxes, fees, etc. is not sufficient to provide full labor to the labor force.
iii Income per capita is extremely low and there is also the capacity to save.
iv Foreign loans for development purposes are not strictly stringent and are also not available in the desired quantity.
v There is a shortage of stocks of capital in the country.
vi People lack initiative and entrepreneurship.
vii People are usually extravagant and there are less voluntary savings.
viii A larger part of the population lives in villages and is opposed to their lotta.
ix The government can not suffer from the dissatisfaction of the people by increasing tax rates above a certain limit. It can not also introduce additional taxes for the same reason.
x Thus, there is too much tax evasion.
Under the above conditions, the reader can easily visualize the state of affairs that a government in the backward country faces. Still, no government would like to be a quiet spectator and would like the standard of living for the people to go up in the shortest possible time. It will try to find money from the blue if it is necessary to spread the economic development of the country. Here, deficit financing will save. The state uses this instrument to lift the economy out of depression and to accelerate economic development in the country. However, if the state can increase resource volumes by increasing tax rates, introducing additional taxes or mobilizing extended savings, it is not desirable to adopt deficit financing as it is a very sensitive instrument.