deficit financing

deficit financing, practice in which a government spends more money than it receives as revenue, the difference being made up by borrowing or minting new funds. Although budget deficits may occur for numerous reasons, the term usually refers to a conscious attempt to stimulate the economy by lowering tax rates or increasing government expenditures. The influence of government deficits upon a national economy may be very great. It is widely believed that a budget balanced over the span of a business cycle should replace the old ideal of an annually balanced budget. Some economists have abandoned the balanced budget concept entirely, considering it inadequate as a criterion of public policy.

Deficit financing, however, may also result from government inefficiency, reflecting widespread tax evasion or wasteful spending rather than the operation of a planned countercyclical policy.

Where capital markets are undeveloped, deficit financing may place the government in debt to foreign creditors. In addition, in many less-developed countries, budget surpluses may be desirable in themselves as a way of encouraging private saving.