Deep dive
What politicians might say
Economic context matters:
The relationships between fiscal policy on the one hand and inflation and interest rates on the other is complex and context-dependent rather than absolute. Several reasons explain why politicians’ claims that increases in government spending will cause inflation or that increasing government debt will lower a country’s credit ratings, are not universally true.
When it comes to inflation:
If the economy has a lot of spare capacity (like many unemployed people, unused factories, or other unused resources), government spending can optimise beneficial economic activity and create jobs without making prices go up too much. But, if resources are scarce, too much government spending can lead to higher prices because demand for goods and services will outstrip what's available.
What money is spent on matters:
Broad, untargeted spending in an overheated economy tends to fuel inflation. However, strategic investments in areas like infrastructure, education, or technology can build long-term economic strength and can create buffers against inflation over time. For example, investing in renewable energy can reduce cost pressures from volatile energy sources like fossil fuels, thus helping to lower inflation in the medium term.
Fiscal and monetary policy coordination is important:
Right now, fiscal and monetary policy often pull in different directions instead of working as a coordinated team. Imagine a government that wants to insulate homes and build clean public transport to cut bills, reduce emissions, and create jobs. The government decides to spend more on these projects and hires workers and firms to do the work. At the same time, inflation is increasing (partly because of geopolitical instability), so the central bank raises interest rates to “cool the economy” by making borrowing more expensive, which slows down spending and investment. Borrowing costs rise also for construction firms and for the government itself, meaning that some projects become more expensive or get delayed and fewer workers are hired than planned. This exact dynamic played out globally post-2021, when governments launched green recovery plans while central banks sharply raised interest rates. More coordinated monetary-fiscal policies (which include ways to keep enough money in the economy without relying on GDP growth) could help central banks meet their primary price stability mandates, while also enabling governments to increase public investments in social and ecological wellbeing and resilience [1].
In summary:
While increasing government spending and debt can contribute to inflation under certain conditions, it is not a fixed rule. The effects depend on broader economic dynamics, structural factors, and policy coordination.
When it comes to rising interest rates:
There is a nonlinear relationship: Evidence from over 100 countries between 1998 and 2014 shows a nonlinear relationship between debt and credit ratings that varies across countries and income levels [2].
Other factors matter more: Institutional and economic strength drives credit ratings more than debt ratios. This includes factors like productive capacity, economic diversification, innovation, institutional quality and credible fiscal plans.
In short, how fiscal rules affect inflation and credit ratings depends a lot on the specific country context, rather than being a single universal economic law.
References
[1] Prieg, L., Mang, S., Caddick, D., Harris, T. & Jourdan, S. (2025). How do you solve a problem like inflation? The case for monetary-fiscal coordination. New Economics Foundation.
[2] Di Maximo, José F., and T. Xavier. (2019). The Nonlinear Relationship Between Public Debt and Sovereign Credit Ratings. IMF Working Paper No. 19/162. International Monetary Fund, Washington, D.C.