Definition
Crowding Out Effect
Crowding out occurs when heavy government borrowing raises interest rates or absorbs available savings, reducing the funds available for private investment.
When the government runs a large fiscal deficit and borrows heavily through market borrowing, it competes with the private sector for the same pool of savings. This can push up interest rates and crowd out private investment, blunting the growth benefit of public spending.
The concern is sharper when the economy is near full capacity. In contrast, when there is slack, public spending may 'crowd in' private investment by boosting demand and confidence — a key argument behind the capex push. The balance between crowding out and crowding in shapes debates on deficit financing.
Related terms
- Capex PushA capex push is a deliberate budgetary strategy of sharply increasing government capital expenditure on infrastructure to spur growth and attract private investment.
- Market Borrowing (Dated Securities)Market borrowing is the money the government raises by issuing dated securities — long-term bonds — to investors to finance its fiscal deficit.
- Fiscal DeficitThe fiscal deficit is the gap between the government's total spending and its total revenue, showing how much it must borrow in a year.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.