Crowding Out

The crowding out view is that a rapid growth of government spending leads to a transfer of scarce productive resources from the private sector to the public sector where productivity might be lower. It can lead to higher taxes and interest rates which then squeezes profits, investment and employment in the private sector. Increased government borrowing may lead to higher demand for loanable funds and therefore a rise in market interest rates e.g. on bonds. This might then increase borrowing costs for private sector businesses.

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