A practice in which a government spends more money than it receives in revenues. The difference constitutes a budget deficit that must be financed by borrowing or printing more fiat money. Deficit financing is a self-initiated consequence, usually sought to stimulate the economy by reducing taxation or increasing government expenditures. In other words, deficit financing refers to the excess of government expenditure over its normal revenue (raised by taxes, fees, income from government-owned corporations or sovereign wealth funds, or other sources). While budget deficits occur for a variety of reasons, deficit financing represents a planned countercyclical policy by which the government attempts to stimulate the national economy which is passing through hard times in terms of contracted economic activity and recessionary or depressionary pressures. To that end, a government may either opt for lowering tax rates or increasing government expenditures in a way that boosts spending and effective demand of household and corporate sectors.

Deficit financing may also result from the mismanagement of national economy, especially because of widespread tax evasion or wasteful spending. In economies that lack developed capital markets, deficit financing may end up indebting the government to foreign creditors. In less- or underdeveloped economies, budget deficits may discourage private saving and have a negative effect on investment.

Keynesian economists recommend such a government action in order to enhance economic activity and reduce unemployment.

It is also known as a deficit spending, compensatory finance, or pump priming.