By 2024, the government of Noveria faced intense debate over its fiscal strategy. Following a period of low productivity growth and weak private sector investment, the nation's net public debt had reached 98% of GDP. In response, the Ministry of Finance proposed a £60 billion "National Renewal Fund," financed entirely through the issuance of sovereign bonds, to upgrade the country's transport, digital networks, and green energy infrastructure.
Supporters of the fiscal expansion argued that Noveria was operating with a persistent negative output gap and that private sector savings were at record highs. They claimed that public investment would mobilize these idle savings, stimulate aggregate demand (ADADAD) through the multiplier effect, and "crowd in" private sector capital by lowering business costs. Over the long run, this would expand Noveria’s productive capacity, shifting the Long-Run Aggregate Supply (LRASLRASLRAS) curve outward and reducing the debt-to-GDP ratio through higher economic growth.
However, fiscal hawks warned that Noveria’s sovereign bond yields had already begun to creep upwards, reflecting growing investor concern over debt sustainability. Critics argued that large-scale borrowing would increase the demand for loanable funds, pushing interest rates higher and directly crowding out private sector investment. Furthermore, with lingering supply-side bottlenecks in the construction and engineering sectors, there were fears that a sudden injection of public spending would fuel demand-pull inflation rather than real output growth. They pointed to the experience of neighboring countries where high debt-servicing costs had forced austerity measures, diverting tax revenues away from critical public services.
Using the information provided, evaluate whether an increase in national debt to fund public investment will harm an economy.
