Deficit refers to the difference between expenditure and receipts. In public finance, it means the government is spending more than what it is earning. Government expenditure and revenue can be split into capital and revenue. Capital expenditure generally includes those expenses which result in creation of assets. Revenue expenditure is primarily that which does not result in asset creation —for example interest payments, salaries, subsidies, etc. Similarly, on the receipts side, whatever the government receives as taxes is revenue receipt. Receipts not of a recurring nature are generally capital receipts. These include domestic and external borrowings, proceeds of disinvestment, recovery of loans given by the Union government, etc. Deficit financing is a necessary evil in a welfare state as as the states often fail to generate tax revenue which is sufficient enough to take care of the expenses of the state. Deficit financing allows the state to undertake activities which, otherwise, would be beyond its financial capacity. The concept was popularised by noted British economist JM Keynes with the aim of pumping a depressed economy. The basic intention behind deficit financing is to provide the necessary impetus to economic growth by artificial means. However, deficit financing helps to a certain extent only and beyond that it may cause havoc. Here are some of the problems of deficit financing.

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Government funding of spending by borrowing is deficit financing. It is used to finance the overallor net budget deficit.
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