Deficit Financing ? It is defined as the process of generating funds to finance the deficit resulting from government spending amounts that exceed the value of the revenues it obtains, and accordingly, the government compensates for this difference by borrowing from the public and selling bonds to them, minting new money, or reducing its accumulated balances by borrowing from the bank. The country’s central.
The term “deficit financing” is also used to bridge the budget deficit, whether this deficit is due to revenues or capital, and it is worth noting that deficit financing may occur as a result of government inefficiency due to widespread tax evasion or increased spending rates.
Deficit financing risk
The country’s governments are seeking to bridge the gap caused by spending amounts that exceed the value of revenues by minting new money, and this in turn will increase the flow of money in the economy, leading to an increase in inflation rates and an increase in the prices of goods and services within the country. It must be noted that deficit financing is by nature inflationary because it increases total spending, which accordingly increases aggregate demand and makes inflation inevitable.
Effects of deficit financing on investment
Deficit financing negatively affects investment because deficit financing leads to inflation in the country’s economy. Working individuals will demand higher wages so that they can meet their basic needs for survival, and if companies accept the request of these employees, this will increase the cost of production and reduce the desire and enthusiasm of investors to invest in this economy.
Advantages of Deficit Financing
- It is one of the most common techniques for meeting development expenditures in a country because deficit financing does not cause any problems for taxpayers or lenders who lend their money to the government.
- The process of minting new money in the country, which is one of the methods of financing the deficit, does not require high costs.
- Deficit financing encourages the government to hire unemployed individuals, which helps them generate income and also increases employment in the economy.
- If the inflation rates caused by financing the deficit remain within reasonable levels, this will enhance the economic development of the country.
- Deficit financing is one of the sources of investment through which more profits can be made, especially for private investors.
Disadvantages of deficit financing
- It can lead to a significant rise in inflation rates and prices, especially when it is not possible to control inflation. Therefore, financing the deficit will be a useless financing method fraught with the risk of inflation, which may lead to the collapse of the country’s economy.
- Since financing the deficit may lead to inflation, individuals with fixed incomes will suffer a lot from that, while owners of capital and businessmen will have a positive effect on them, which leads to a large gap between these two classes in society.
- It leads to a scarcity of capital within the country because the purchasing power will decrease as a result of rising prices and inflation.
- Deficit financing increases the deficit in a country’s balance of payments, which leads to lower exports and higher imports.
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