Day 29 – Q 4.What is deficit financing? Why is it detrimental to the sustainability of government budget? Examine.
4. What is deficit financing? Why is it detrimental to the sustainability of government budget? Examine.
घाटे का वित्तपोषण क्या है? सरकारी बजट की स्थिरता के लिए यह हानिकारक क्यों है? जांच करें।
Introduction:
Deficit financing is the budgetary situation where expenditure is higher than the revenue. It is a practice adopted for financing the excess expenditure with outside resources. The expenditure revenue gap is financed by either printing of currency or through borrowing.
Why deficit financing is detrimental?
- Increase in financial burden leading to a vicious cycle.
- Decline in investment. BOP crisis.
- Deficit spending raises interest rates resulting into crowding out effect. There is a limited amount of funds available for investment, and when government competes with the private sector for a share of these funds to finance its deficit spending, it drives the cost of these funds. The increase in the interest rates causes investment to fall, and lower investment translates into lower output and lower economic growth.
- Increase in money supply due to deficit financing may result into inflation.
Addressing fiscal deficit:
- Fiscal consolidation- The NK Singh Committee advocated fiscal deficit as the operating target to bring down public debt. For fiscal consolidation, the centre should reduce its fiscal deficit from the current 3.5% (2017) to 2.5% by 2023.
- Rationalizing expenditure- Reducing expenditure on subsidies. Increasing capital expenditure so that it has a multiplier effect on economy.
- Budgetary planning should be such that the risk of deficit financing is taken into account.
Conclusion:
Fiscal deficits are detrimental to the sustainability of the government budget. However, deficits are not always bad. When the economy goes into recession, deficit spending through tax cuts or the purchase of goods and services by the government can stop the downward spiral and help to turn the economy back around. Thus, deficits can help stabilize the economy. Thus, a balanced approach should be adopted.
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