What Is the Meaning of "deficit Financing"?

What Is the Meaning of "deficit Financing"?

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.

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.