When an increase in government expenditure or a decrease in government revenue increases the budget deficit, the Treasury must issue more bonds. This reduces the price of bonds, raising the interest rate.

What happens when deficit spending increases?

A government experiences a fiscal deficit when it spends more money than it takes in from taxes and other revenues excluding debt over some time period. ... An increase in the fiscal deficit, in theory, can boost a sluggish economy by giving more money to people who can then buy and invest more.

Does spending increase interest rate?

If an increase in government spending and/or a decrease in tax revenues leads to a deficit that is financed by increased borrowing, then the borrowing can increase interest rates, leading to a reduction in private investment.