Glossary

Crowding out

The idea that government borrowing raises interest rates or uses resources that would otherwise go to private investment and spending.

Also called: crowding out effect, crowding out private investment

Crowding out is the theory that when government borrows heavily to finance deficits, it competes with businesses and households for a limited pool of savings, pushing up interest rates and reducing private investment. Government spending may also displace private activity directly, such as when public provision of a service replaces private provision.

In the standard version, higher interest rates make loans costlier for firms, so some projects are abandoned, and the net effect of deficit spending is smaller than it first appears. The effect depends on the state of the economy: during recessions, when savings are abundant and demand is weak, crowding out is thought to be small, which is part of the Keynesian case for stimulus. In a fully employed economy, it can be larger, and in an open economy, foreign capital inflows can ease it.

Fiscal conservatives cite crowding out as a reason to reduce deficits and the national debt. Others point out that interest rates stayed low despite large deficits in the 2010s, so evidence of crowding out was limited, though higher interest rates after 2022 renewed concern. Empirical estimates vary widely. The concept is a standard point in debates over fiscal policy.

Last reviewed November 8, 2026

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Related terms

Budget deficit The amount by which federal spending exceeds revenue in a given year, financed by borrowing. National debt The total amount the federal government owes from past borrowing, including debt held by the public and by government accounts. Fiscal policy The use of government taxing and spending to influence the economy, set by Congress and the president. Keynesian economics A school of macroeconomics, from John Maynard Keynes, holding that government spending can offset slumps in private demand. Debt-to-GDP ratio Federal debt measured as a share of the economy's annual output, used to judge whether borrowing is sustainable.