- Inflationary Pressure:
- High fiscal deficit can increase aggregate demand.
- If resources are fully utilized, firms may not meet demand, leading to price increases.
- Crowding Out:
- Government borrowing to finance deficit competes with private sector for savings.
- This can reduce funds available for private investment.
- Debt Burden:
- Leads to higher public debt.
- Requires future repayment and interest servicing.
- Can become unsustainable if return on investment is lower than borrowing cost.
- Reduced Productive Spending:
- Large revenue deficit within fiscal deficit means borrowing for consumption.
- May lead to reduction in productive capital expenditure.