Final answer:
Economists consider government debt increases less problematic when used for public investment and infrastructure because it can bolster economic growth. Higher interest rates may compel governments to cut spending or increase taxes to manage budget deficits. The crucial factor is maintaining a stable debt-to-GDP ratio and fiscal confidence.
Step-by-step explanation:
Many economists believe that increases in government debt are not problematic if the funds are used for public investment and infrastructure. This is because such investments can enhance economic growth and productivity, potentially increasing the tax base and improving the ability to service the debt. Managing government debt involves balancing the purposes of borrowing with the economic impact of servicing that debt. Rising interest rates can create pressure on a government to reduce its budget deficits through spending cuts and tax increases, which might have a contractionary effect on the economy.
When government funds are used to pay down national debt or for potential tax refunds, it can affect the overall debt-to-GDP ratio of a country. Possibilities include a small budget deficit leading to a reduced debt/GDP ratio if the economy grows proportionally more than the debt. Conversely, even with a budget surplus, if the economy shrinks, the debt/GDP ratio might rise.
Overall, the key is to manage the ratio of debt to the nation's GDP and confidence in the country's fiscal strategies.