Deficit Finance

Oct 03, 2009 (LBO) - First of all it’s necessary to say, that there can be several definitions of budget deficits such as the structural budget deficit, the inflation adjusted budget deficit, the nominal budget deficit, the primary budget deficit, the budget deficit on current account and the over-all budget deficit. Each definition has its uses for analysis.

There are issues regarding grants from foreign countries, receipts from privatization which affect the computation of the budget deficit. When there is a deficit in the over-all budget then the deficit has to be covered by funding which means borrowing.

We can borrow from the public; from the banks ( as the Tudor kings and the European monarchs of the 16th and 17th Century did) or from foreigners. Here too we can borrow from the multilateral lending agencies like the World Bank or the ADB or bilaterally from other governments such as China, Japan or USA.

The latter are foreign currency loans to be repaid in a designated foreign currency. The Ports Authority has taken a large amount of loans denominated in yen. Most of the multilateral lending is for projects and the Rupees have to be spent first before the World Bank or the ADB will reimburse the money.

Narrow Definition

The narrower definition of deficit finance refers to bo