When the nominal rate rises as a result of higher inflation, tax revenue increases, but at the same time, expenditure also increases due to higher wages and costs. Until now, the government bonds already issued at higher rates have been refinanced by those newly issued at lower rates, and the total interest payments of government bonds have been reduced.
Going forward, however, not much from such a refinancing effect can be counted on (Chart 19). Under such circumstances, higher inflation will lead to an increase in interest payments, a factor that increases government expenditure. Thus, simply raising inflation will not lead to an improvement in fiscal balances (Chart 20).