Deficit Financing Also
Deficit Financing, also described as 'compensatory finance 'or loosely as 'pump-priming', large-scale borrowing to meet an unusual situation requiring large expenditure; more specifically a policy employed by a Government to finance a budget deficit incurred to alleviate .unemploymentduring a business depression or otherwise to stimulate the economy. Such financing would normally entail borrowing against the issue of Government securities, that is increasing the National Debt.
The case for deficit financing derives from macro-economic or employment theory. To the extent that large-scale .unemploymentin a business depression is due to a fall in incomes and purchasing power, most economists believe that one way of alleviating it is to inject more purchasing power into the economy by Government spending than is collected in the form of taxation or other revenue. This injection requires a budget deficit.
With the general growth of Government expenditures, particularly in investment, deficits have now become a fairly regular feature of Exchequer budgets in Britain, U.S.A. and elsewhere even in times of normal employment.
The British Exchequer has three main sources of borrowing: (a) internal (surplus National Insurance funds, sterling capital of the Exchange Equalization Account); (b) non-market borrowing (Savings Certificates, Defence Bonds); (c) market borrowing, by sales of quoted marketable securities, Treasury Bills, etc.
Total Government borrowing at any one time will not necessarily measure the extent of deficit financing since it includes borrowing for other purposes (e.g. the capital requirements of the nationalized industries).