In public finance, deficit financing generally implies which of the following situations in the government budget?

Introduction / Context:
Deficit financing is a term frequently used in discussions of government budgets and macroeconomic policy. It occurs when the government spends more than it collects in revenue and must find ways to finance this gap. Understanding what deficit financing implies in simple terms is important for students preparing for economics and general studies examinations. This question focuses on the relationship between public expenditure and public revenue when deficit financing takes place.

Given Data / Assumptions:

• Public expenditure refers to all spending by the government, including on salaries, infrastructure, defence, education, and social schemes.
• Public revenue includes all receipts such as taxes, fees, and non tax income in a given financial year.
• A deficit arises when expenditure is greater than revenue; a surplus arises when revenue is greater than expenditure.
• Deficit financing often involves borrowing from the central bank or the public and sometimes leads to creation of new money.

Concept / Approach:
Deficit financing in a straightforward sense means that the government budget shows a deficit. This happens when public expenditure exceeds public revenue in a given year. To bridge this gap, the government finances the deficit either by borrowing from the public, from financial institutions, or from the central bank. Borrowing from the central bank can result in the creation of new currency. Therefore, the core idea is that expenditure is greater than revenue, not that revenue exceeds expenditure or that only currency replacement is occurring with no budget gap.

Step-by-Step Solution:
Step 1: Recall that a budget deficit occurs when public expenditure is greater than public revenue in a financial year.Step 2: Recognise that deficit financing refers to the government practice of funding this deficit through borrowing or money creation.Step 3: Examine the options and identify which statement describes the budget situation implied by deficit financing.Step 4: Option d states that public expenditure is greater than public revenue, which is precisely the condition for a deficit.Step 5: Confirm that the other options either describe a surplus (revenue greater than expenditure), simple currency replacement, or repayment of debt, none of which correspond to deficit financing.

Verification / Alternative check:
Public finance textbooks define deficit financing as the practice undertaken by a government to meet a budget deficit through methods such as borrowing or monetisation. They start from the basic identity that deficit equals expenditure minus revenue. If expenditure exceeds revenue, the difference must be financed, giving rise to deficit financing. Sections explaining types of budget also distinguish clearly between surplus, balanced, and deficit budgets, reinforcing that deficit is associated with expenditure greater than revenue.

Why Other Options Are Wrong:
Replacing worn out currency notes with new ones of the same value does not change the budget position and is a routine central bank function, not deficit financing. Public revenue in excess of public expenditure corresponds to a budget surplus, not a deficit. Printing new currency notes without any reference to budgetary imbalance is incomplete and could refer to several activities; deficit financing refers specifically to bridging a gap between expenditure and revenue. Reducing public debt by repaying old loans goes in the opposite direction of deficit financing, as it may require surplus funds or additional revenue.

Common Pitfalls:
Some learners equate deficit financing with the simple act of printing new currency, overlooking the budgetary context. Others confuse surplus and deficit and may mistakenly think that more revenue than expenditure is problematic. To avoid these errors, it is important to remember the basic budget identity and that deficit financing arises when the government spends more than it collects in revenue and must finance the difference.

Final Answer:
Deficit financing implies that public expenditure in a financial year is greater than public revenue and the gap is financed through borrowing or money creation.