As we know, the main sources of government revenue are taxes, fees, prices, special assessments, fees, gifts, etc., etc. If during a certain period, public expenditure exceeds income and the shortfall is met by borrowing, called the financing or income creating finance. With a view to a significant expansion effects therefore, a program of public investment must be financed by borrowing rather than taxation. This form of borrowing or spending loan is popularly funding
Deficit financing is said to be practiced if state adopts one or all of the methods listed below :.
(a) The government is based on the liquidity of the past.
(b) the government borrows from the central bank against government securities.
(c) the government creates money by printing of paper currency and thus meets the expenditures than revenues.
(d) the government borrows externally.
Deficit financing was considered a very dangerous weapon by the classical economists. However, modern economists are leaning towards it and recommend it to be used for accelerating the economic development and the achievement of high levels of employment in the country
The problem needs to be solved.
(i) or income creating finance for increasing the total effective demand should be adopted.
(ii) If financing is desirable to ensure high levels of employment, then to what extent should run.
(iii) What are the good and bad consequences?
Deficit financing is practiced by advanced and underdeveloped countries. Using the developed countries as a means of increasing the effective demand, while the under-developed countries is employed for increasing the rate of capital formation.
The size of the financing of the deficit for accelerating economic growth in lagging economy is very bright as they are caught in a vicious circle of underdevelopment. They use funds for investment when the resources of the country are not sufficient to initiate takeoff processes. This creates the need for funding
The underdeveloped countries are facing the following problems: ..
(i) The rate of population growth is faster than the pace of economic development
(ii) receive government revenues through taxes, fees, etc., is not sufficient to provide full employment to employment.
(iii) the per capita income is extremely low and so is the ability to save.
(iv) foreign loans for development purposes are not without strings and are not available in the required quantity.
(v) There is a lack of stock of capital in the country.
(vi) People lack initiative and entrepreneurial ability.
(vii) People are usually extravagant and less voluntary savings.
(viii) A larger proportion of the population lives in villages and are supplied with their lot.
(ix) the government can not make the displeasure of the people by improving the tax rates beyond a certain limit. It also may not impose additional taxes for the same reason.
(x), there is too much evasion of taxes.
Under the above conditions, the reader can easily visualize the situation faced by the government of the backward country. Still no government would like to be a silent spectator and wish that the living standards of the people have to go in the shortest possible time. It will try to find money from the blue, if necessary, to distribute the economic development of the country. This funding is going to save her. The state uses this tool for lifting the economy out of the depression and to accelerate economic development in the country. However, if the state can increase the amount of resources
by taking the increase in tax rates, the imposition of additional taxes or mobilizing increased savings, it is not desirous of borrowing because it is a very delicate instrument .