Q:

What is the meaning of "deficit financing"?

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Quick Answer

The Encyclopaedia Britannica defines deficit financing as the practice of borrowing or minting money to cover shortfalls in a budget, usually a government budget. The amount financed is built into the annual budget, not a sudden shortfall. Deficit financing is not the same thing as debt; while debt may have accrued over years due to annual deficits, a deficit is the shortfall in a specific budget covered by a loan.

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Full Answer

John T. Harvey, a contributor at Forbes Magazine, points out that the surplus created by a deficit winds up in the private sector, where it can create faster economic growth, stimulating the economy overall. This, however, should only be seen as a short-term stimulus. Economics editor David Wessel of the Wall Street Journal points out that while short-term deficit spending may be good for creating growth in a sluggish or shrinking economy, habitual deficit spending is unsustainable and eventually will cause a market crash, at which point the indebted government will no longer be able to borrow money and will be forced to reduce spending.

Balanced-budget amendments are the main strategy for eliminating deficit financing in governments. These amendments force budget planners to spend no more than anticipated incoming revenue. For a business running regular deficits, the solution is to either increase overall revenue or go out of business.

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