> Debt does not (necessarily) mean high taxes in the future.
You are right, that's why I called it another possibility. To list them all explicitly.
Higher debt now means that the future either has default, higher (than anticipated) inflation or higher taxes.
(A steady inflation doesn't do anything to debts: at the time the debt is incurred, any anticipated inflation shows up in the nominal interest rate. Similarly, getting a reputation for defaulting increases your nominal interest rate. A reputation for high taxes doesn't do anything to the interest rate directly.)
Responsible governments try to avoid default and ever increasing inflation. That leaves taxes. Or taking on less debt in the first place.
About slack:
Modern central banks target inflation. If there's slack like you describe, a competent central bank will inject more money until inflation is at the target.
Central banks wire their profits to the treasury. That includes the seigniorage income they make from propping up inflation back to the target.
That's just bog standard monetary policy. And doesn't crowd out private sector investment and consumption and is perfectly capable of picking up any slack.
(That's not to say the fiscal side of government doesn't have any effects at all. But that's more on the supply side.)
You are right, that's why I called it another possibility. To list them all explicitly.
Higher debt now means that the future either has default, higher (than anticipated) inflation or higher taxes.
(A steady inflation doesn't do anything to debts: at the time the debt is incurred, any anticipated inflation shows up in the nominal interest rate. Similarly, getting a reputation for defaulting increases your nominal interest rate. A reputation for high taxes doesn't do anything to the interest rate directly.)
Responsible governments try to avoid default and ever increasing inflation. That leaves taxes. Or taking on less debt in the first place.
About slack:
Modern central banks target inflation. If there's slack like you describe, a competent central bank will inject more money until inflation is at the target.
Central banks wire their profits to the treasury. That includes the seigniorage income they make from propping up inflation back to the target.
That's just bog standard monetary policy. And doesn't crowd out private sector investment and consumption and is perfectly capable of picking up any slack.
(That's not to say the fiscal side of government doesn't have any effects at all. But that's more on the supply side.)