The financial encyclopedia uses cookies to improve your user experience. Find out more here!




Deficit financing


A deliberate excess of expenditure over income. When carried out by governments, it is also known as compensatory finance or pump priming. Such deficit financing takes the form of a budgeted deficit financed by borrowing. It has the object of stimulating economic activity and employment by injecting more purchasing power into the economy. In fact, with the growth of government expenditure, budget deficits are now common even in times of full employment so that deficit financing in the true sense would normally consist of increasing the deficit as a matter of policy. The use of deficit financing as a part of monetary policy was first advocated by J. M. Keynes.


Reference: The Penguin Dictionary of Economics, 3rd edt.