Question
Why do governments borrow money when they can simply increase taxes?
A. Governments borrow to finance public expenditure without immediately imposing higher taxes on households and businesses.
Borrowing allows large infrastructure projects to be financed over time, helps stabilise the economy during recessions and avoids sudden tax increases that could weaken private consumption and investment. It also distributes the financial burden of long term projects across the generations benefiting from them. However, excessive borrowing increases future interest obligations and can eventually require higher taxes or spending cuts.