Final answer:
Fiscal sustainability is the term describing the government's ability to manage finances, including raising revenues and paying off debts. The category of government spending that automatically increases with federal debt is interest payments on the borrowed funds. Large and sustained borrowing can impact the private sector and lead to broader economic challenges.
Step-by-step explanation:
The term that describes the government's ongoing ability and willingness to raise revenues, incur debt, and meet its financial obligations as they become due is known as fiscal sustainability. When a government incurs debt, it must manage it responsibly to maintain fiscal health. A major challenge in this respect is the self-reinforcing quality of debt, where certain types of government spending increase as the federal debt grows. This primarily refers to interest payments on the debt, which become larger as the government borrows more and the total debt rises.
Responsible fiscal management involves careful evaluation of the impact of spending. Running a budget deficit necessitates borrowing, which, if large and persistent, can absorb financial resources from the private sector, leading to potential trade imbalances and financial crises. Governments have to balance their spending against fiscal responsibilities and the need to support various demanding sectors within the economy.