Crowding out

Definition

Crowding out occurs when public sector spending increases to the point where it absorbs a significant portion of available financial resources, leading to a reduction in private sector investment. This phenomenon can result from higher interest rates due to increased government borrowing or direct competition for funds.

Related terms

Fiscal Policy: Government adjustments to its spending levels and tax rates to monitor and influence a nation’s economy.

Interest Rates: The cost of borrowing money expressed as a percentage of the total amount loaned, which can increase or decrease based on policy or economic conditions.

Private Sector Investment: Expenditures by businesses and individuals on capital goods such as buildings, machinery, and equipment intended to generate future profits