Option 1 -> Taxation and borrowing are both methods government uses to finance its spending/expenditure.
Option 2 -> Borrowing itself is a financing method, not something to be financed by taxation and borrowing.
Option 3 -> Taxation is a financing tool, not an end to be financed.
Option 4 -> Deficit is a result of excess expenditure over revenue, not what taxation and borrowing finance.
Hence, Option 1: Financing expenditure -> Ricardian equivalence theory states that government expenditure can be financed either through current taxation or through borrowing (which implies future taxation). According to this theory, rational consumers recognize that government borrowing today means higher taxes in the future to repay the debt. Therefore, they increase their savings to prepare for future tax liabilities. This makes taxation and borrowing 'equivalent' means of financing government expenditure, as both have the same ultimate effect on private consumption and savings behavior. -> correct