What is a potential consequence of increasing national debt due to budget deficits?

An increase in national debt, stemming from persistent budget deficits, can lead to higher interest rates and reduced private investment. When a government borrows extensively to finance its deficits, it competes for available loanable funds in the financial markets. This increased demand for borrowing typically drives up interest rates, as lenders seek to compensate for the increased risk associated with higher levels of national debt.

As interest rates rise, private investment tends to fall. Higher borrowing costs make it more expensive for businesses to finance expansion and for consumers to undertake large purchases, such as homes and cars. Consequently, the greater reliance on government borrowing can crowd out private investment, leading to slower economic growth. This phenomenon illustrates the potential trade-off between government spending and private sector economic activity, underscoring the significant impact increasing national debt can have on the overall economy.