Since the spending increases, the economy tends to increase. ADVANTAGES OF DEFICIT FINANCING :-Following are the important advantages of deficit financing : 1. This is initially done through the sale of government securities, such as Treasury bonds (T-bonds). Interest payments drive up government expenditure in subsequent periods and increase the deficit in the future. This leads to excessive borrowing from other nations, that too at a high interest rate. Unplanned expenses for things like natural disaster relief and military emergencies can incur large, short-term expenses. Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. Though the government borrows from other nations and this leads to increased infrastructure, the fact remains that the borrowing is done at a very high interest rate. This chain reaction, called the crowding out effect, can eventually lead to a situation where the federal government allocates less money to investments, such as public education and the highway system, placing more of a burden on state, county and local governments. Business. There are different ways of financing the expansion Raising Revenue: Theoretically fiscal deficit can be financed by higher taxes, but when the economy is slowing it is unpopular & prevents further spending by people Impacts on Credit Rating An individual/government will have no savings during a deficit period. Maintaining a budget deficit means there is never money left over after paying expenses, which can put governments at a disadvantage in a number of ways. Money does flow in, but the debt remains; the actual investment of the country does not increase, taxation reduces, and the debt keeps piling up. This deficit financing method causes a larger volume of the deficit in a country’s balance of payments scenario. All deficits need to be financed. India’s fiscal deficit accounted at 3.8 percent in 2019-20 and will be targeted at 3.5 percent in 2020-21, Finance Minister Nirmala Sitharaman said in her Union Budget speech. Therefore, if the government is able keep the inflation in the country within a reasonable level, deficit financing will promote economic development —thereby neutralizing the disadvantages of price rise. This, in turn, leads to employment of labor force. It can risk national sovereignty. The following WealthHow article enlists the advantages and disadvantages of deficit spending. Hybrid financing: Many companies turn to a combination of debt and equity financing to fund their ventures. We hope you enjoy this website. We've created informative articles that you can come back to again and again when you have questions or want to learn more! He has over twenty years experience as Head of Economics at leading schools. Deficit financing is a method of meeting government deficits through the creation of new money. We'll assume you're ok with this, but you can opt-out if you wish. The interest rates matter as well, and a higher interest will force them to think of plans to pay back the debt as soon as possible. A country will typically have no savings during a deficit period since they must prioritize paying off the debt and interest. A trade deficit is neither inherently entirely good or bad. Copyright © Wealth How & Buzzle.com, Inc.