Public Finance (Econ 4122)
CHAPTER-7
DEFICIET FINANCING
Deficit Financing
• It means the way the gap between excess of government expenditure over its
receipts is financed.
• Whenever there is deficit in the current account, its financing becomes deficit
financing.
• In the modern sense public borrowings to finance excess of public expenditure
over revenue is included in the capital account of the budget.
Methods of Deficit Financing
1) Governments can borrow from non-bank investors or commercial banks. This is
considered non-inflationary as it tends to replace private expenditure.
2) When the government draws from its cash balances with the central (National)
bank . It is not inflationary.
3) Run down its cash reserves : It increase the supply of the supply of currency of
the government in the economy .
4) When the government borrows from the central bank against its securities, the
central bank creates new money by resorting to the printing press(highly
inflationary).
Deficit Financing
5)Privatization: Selling of its own assets like
properties and investments.
• Selling of government enterprise for private
sector to get finance like Bahirdar Textile ,
sugar factors for private sectors in Ethiopia
2019.
6) Owing special programme like dinning
prgramme ,Diaspora trust fund etc.
7) Issuance of currency or money creation . It is
highly inflationary.
Deficit Financing
7.2 Objectives of deficit financing
Deficit financing has been ascribed an important role in fiscal policy on
account of increases in public expenditure on various accounts.
To finance wars
To fight unemployment during depression
To promote economic development
To mobilize surplus, idle and unutilized resources
To finance the Plans
To serve as an alternative tool such as low taxable capacity and low
savings.
7.3 Effects of deficit financing
• Deficit financing and inflation
• Effect on distribution of income( favor profit earner class )
Deficit Financing
Limits (factors affecting )to deficit financing
• Growth rate of the economy and money supply.
• The efforts made by the government to mobilize its
resources.
• Control of incomes and prices
• The growth of monetized sector
• Increase in the production of public sector
• Promotion of imports
• Restriction on credit
• Direct and indirect control
• Public spirit of cooperation and toleration.