Financing deficits in recession

Using budget deficit financing through external borrowing

Description

Financing deficits in recession involves securing funds to cover government budget shortfalls during economic downturns. The essential action is to mobilize resources—through borrowing, monetary expansion, or reallocating expenditures—to sustain public services, stimulate demand, and stabilize the economy. This strategy remedies reduced tax revenues and increased social spending by ensuring liquidity, preventing deeper contraction, and supporting recovery, while managing risks of inflation and long-term debt sustainability.

Context

In the early 1980s many countries ran into serious balance of payments problems. Recession in the industrial countries reduced the export earnings of developing countries, while high real interest rates increased their debt service obligations. Some lenders, concerned about the ability of individual borrowers to surmount these difficulties and uncertain about world economic prospects, became less willing than they had been to increase their lending.