If people have more money to spend, more people will try to purchase goods that are available in limited quantities. This is initially done through the sale of government securities, such as Treasury bonds (T-bonds). The essence of such policy lies in government spending in excess of the revenue it receives. The government’s current fiscal deficit is justified by the possibility that such actions can help the country recover from the recession in the near future. List of cons of deficit financing: It can result to be a sluggish economy. Developing countries aim at achieving higher economic growth. Sharing ownership and having to work with others could lead to … There are many options available for business financing, each coming with its own set of pros and cons. Finally, this inflationary method of financing leads to a larger volume of deficit in a country’s balance of payments. High level of employment is ensured by the policy of deficit financing. Disclaimer Copyright, Share Your Knowledge Advantages of deficit spending: Money spent by the government on the infrastructure helps in creating employment. It is to be remembered here that government borrowing from the public by selling bonds is not to be considered as deficit financing. Government Borrowing can be acceptable under certain conditions. Trade deficits are no guarantee of economic weakness. Let’s imagine that you were evaluating whether or not to take a loan with an interest rate of 14%. Not all the profits … They are considered among the safest investments since they are backed by the full faith and credit of the United States Government. As a source of finance, tax-revenue is highly inelastic in the poor countries. List of Cons of Deficit Spending. A budget deficit arises when the estimated expenditure exceeds estimated revenue. A trade deficit is not necessarily an unfavorable situation. The following Buzzle article enlists the advantages and disadvantages of deficit spending. Is a trade deficit beneficial or detrimental to a country's economy? Below are the advantages and disadvantages mentioned: Advantages. Disadvantages or Limitations of Using Liquidity Ratios Analysis. As mentioned above, the creation of a fiscal deficit can be justified. If the government fails to stabilize the price level, rising prices lead to increased costs which compel the government to mobilize additional revenues through deficit financing. Due to the tax advantages of debt financing, you’ll need to adjust your interest rate when comparing debt financing to alternative financing options. But what are the positive transformation it brought to earthlings besides the adversities? Since deficit financing raises aggregate expenditure and, hence, increases aggregate demand, the danger of inflation looms large. And, underdeveloped countries— being inflation-sensitive countries—get exposed to the dangers of inflation. (b) One cannot escape from the vicious circle of deficit financing once this popular method of financing is adopted. Advantages and disadvantages of Deficit Spending – Assignment. To activate idle resources as well as divert resources from unproductive sectors to productive sectors with the objective of increasing national income and, hence, higher economic growth, iv. … The technique of deficit financing may be used to promote economic development in several ways. Fourthly, deficit financing has certain multiplier effects on the economy. Though public deposits constitute an attractive source of finance and the investors do prefer them, there are certain severe limitations and dangers. Ultimately, excess dose of deficit financing leading to inflationary rise in prices will exacerbate income inequality. Deficit spending is used as an indicator of the financial health of the government. It is most commonly applied to government budgets. Considering the needs of the economy, its use cannot be discouraged. Therefore, the responsibility of drawing financial resources to finance economic development rests on the government. But it must not be forgotten that it is self-destructive in nature since it has the potentiality of raising output level to counter the inflationary threat. Opportunity cost of debt interest payments. certification program, designed to help anyone become a world-class financial analyst. It does not take into account various non-financial aspects such as market competition, economic conditions, political situation, government rules, and regulations, etc. The Financial Stability Report from RBI also shows an increase in bad loans and Non-Performing Assets (NPA). For instance, demand for food grains is com­paratively higher in these countries. Advantages of fiscal policy include the ability to allocate money to the areas that need it most and having a way to provide a stimulus without adding to the deficit. It has to be kept within the ‘safe’ limit so that inflationary forces do not appear in the economy. The technique of deficit financing results in an increase in government expenditure which produces a favourable multiplier effect on national income, saving, employment, etc. Deficit financing in India is said to occur when the Union Government’s current budget deficit is covered by the withdrawal of cash balances of the government and by borrowing money from the Reserve Bank of India. This is because of the fact that it creates excess purchasing power. If money collected through deficit financing is spent on public good or in public welfare programmes, some sort of favourable distribution of income and wealth may be made. Disadvantages of deficit financing are equally important. 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