A country’s overall debt to its creditors is known as its government debt
When inflation occurs, the value of money decreases, meaning that the amount of debt owed by the government decreases in real terms
This implies that the government may repay its debt in an inflationary environment with less valued currency than it borrowed, lowering the loan’s actual worth
However, the impact of inflation on government debt is not entirely positive
If inflation is high and uncontrolled, it can lead to an increase in interest rates, which can cause the cost of borrowing to rise
When the cost of borrowing increases, it becomes more expensive for the government to service its debt
This can lead to a situation where the government may have to borrow more money just to pay the interest on its existing debt, leading to an increase in the overall debt burden
Furthermore, inflation can also impact government deficits. A government deficit occurs when government spending exceeds its revenue