Research shows that high levels of debt correlate with
slower economic growth.
There are four main reasons for this.
1. High government debt crowds out private investment by
taking up resources that could be used by the private sector. High
deficits reduce the amount of money available, which drives up interest
rates and increases the cost of borrowing money. This makes it more
difficult for some private businesses and individuals to borrow money.
2. High debt prevents the government from taking up the
slack in demand and paying its entitlements during a crisis.
3. Money spent servicing the debt is money that is not
being spent on critical investments in the future.
4. When governments decide to pay down debts they often
resort to distortionary taxation or inflation, which threatens investments
by creating uncertainty.