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 in order to increase economic activity and reduce unemployment. This is also called compensatory finance pump priming. 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.
Critics of deficit financing regularly
denounce it as an example of shortsighted government policy. Advocates argue
that it can be used successfully in response to a recession or depression,
proposing that the ideal of an annually balanced budget should give way to that
of a budget balanced over the span of a business cycle.