Question

Briefly explain four ways in which budget deficits can be financed.

Answer 1

Budgrt deficit is when government expenditure exceeds the revenue it earn i.e. by taxes

Budegt deficit can be financed through the following ways :

1) Reducing expenditure - one way it can do is reduce its spending (can be on public goods, provide less to government servents etc). It can be the best option to do so but can lead to fall in GDP of the country.

2) Increasing the taxes - Another way to do so is to increase its revenue it earn through taxes. It is not the best option as it reduces the incentive to work. Also citizens will also not like this option.

3) Printing money - It can also finance through printing money. But this is the thing that government quite avoid as printing money leads to inflation in the economy. So printing money has many cons with it as it reduces the real variables also.

4) Borrowing - The last option available is borrowing. Borrowing can be done through public or through foreign governments. All it has to pay is the interest in the future. And this is the best option that government have as it doesn't lead to inflation nor causes GDP to fall. It create a debt on the country.