Crowding out (economics) - Definition and Overview

In economics, crowding out occurs when the government is borrowing heavily while businesses and individuals also would like to borrow. The government can always pay the market interest rate, but the private sector cannot, and is therefore crowded out. The state is in other words borrowing so much that interest rates increase, which in effect squeezes the private sector out of the credit markets. Crowding out can also come from state spending on areas that might be provided more efficiently by the private sector, such as health care, or even through charity and redistribution.

At times, excessive government borrowing has caused low private sector borrowing and, consequently, low investment and (because the economic returns on public borrowing are typically lower than those on private debt, especially corporate debt) slower economic growth. This has become less of a concern in recent years as government indebtedness has declined and, because of globalization, companies have become more able to raise capital outside their home country.