What is a common impact of a fiscal deficit on the economy?

A common impact of a fiscal deficit on the economy is higher government borrowing costs. When a government runs a fiscal deficit, it means that its expenditures exceed its revenues. To cover this gap, the government often needs to borrow money, which can lead to increased demand for loans in the financial markets.

As a consequence of this higher demand for borrowing, lenders may require a higher interest rate to compensate for the increased risk associated with lending to a government that is already in deficit. Additionally, if investors perceive that the fiscal situation is unsustainable, they may further increase borrowing costs due to concerns about the government's ability to repay its debt in the future.

Thus, the relationship between fiscal deficits and government borrowing costs tends to be directly proportional; as deficits rise, so can the costs associated with borrowing. This can create a cycle where higher borrowing costs may limit the government’s ability to finance future deficits, leading to potential cuts in public services or reduced investments.