This revision video looks at the arguments for and against the crowding-out view of higher government spending and borrowing.
Supporters of the crowding-out view argue that higher state spending and borrowing can be inefficient and might lead to increased real interest rates and taxes for the private sector which eventually undermines the impact of a fiscal stimulus.
Keynesian economists counter that well-targeted and timely stimulus spending helps to support growth, output, jobs and competitiveness. Indeed higher government spending can be partially self-financing and an important policy option when private demand is depressed, for example following an external shock.
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