Evil Effect of Deficit Financing

Deficit financing, particularly if it is of large magnitude, has certain adverse effects on the functioning of the economy. The main adverse effects on the functioning of the economy. The main adverse effect are explained below:-
1. Inflationary rise in prices:- Deficit financing may may result in inflationary rise in prices. An increase in money supply resulting from deficit financing increases the demand for goods and services. In the absence of corresponding increase in aggregate supply of goods and services. In the absence of corresponding increase in aggregate supply of goods and services increase in the long run. Rising prises leads to rising cost which leads to further rise in prices, so that cost spiral s set in.
2. Forced Saving:- The impact of forced saving may fall on fixed income earners rather than on the higher income groups.
3. Distribution of income:- Profits tend to rise, while the purchasing power of the fixed income group is reduced on account of rise in prices. Therefore, deficit financing tends to redistribute income and wealth in favor of profiteering classes, i e producers, businessmen and traders, etc. Hence the inequalities in the distribution of income and wealth widen as a result of deficit financing.
4. Change in the pattern of investment :- Deficit financing may lead to distribution of investment. It may encourage the of investment which are desirable for a developing economy, such as hoarding, speculation and construction.
Thus, deficit financing is an important device for financing development plane if underdeveloped countries and accelerating their rate of economic development. But if deficit financing is not kept within the limits, it may give rise to serious adverse effect in the form of inflationary rise to serious adverse effects in the form of inflationary rise in prices, distorted investment and unequal and unjust distribution of income.