Final answer:
Increased government borrowing can lead to higher interest rates, require spending cuts and tax increases, and pull resources from domestic investment. It may also increase financial market uncertainty and lead to high inflation tactics that reduce real wealth.
Step-by-step explanation:
An adverse effect of increased government borrowing is that it can lead to higher interest rates, as lenders demand a premium for the increased risk associated with lending to a government with high debt levels. This can make the cost of financing government debt more expensive, and consequently, to maintain financial stability, a government might need to reduce its budget deficits. This is often achieved through politically challenging measures such as spending cuts and tax increases, which can in turn have a contractionary effect on the economy by reducing aggregate demand. Additionally, heavy borrowing risks pulling resources away from important domestic investments in human and physical capital that are critical for economic growth.
Rising government debt can also create uncertainty in financial and global markets. Increased debt to GDP ratios may lead to a lack of confidence in the country's fiscal management, potentially causing market destabilization. In some cases, governments might resort to allowing high inflation to reduce the real value of the debt, which harms real wealth and could potentially devalue savings and investments tied to fixed interest rates.