Crowding Out

Crowding out occurs when the government increases its borrowing to fund spending, such as infrastructure projects, which raises interest rates. Higher rates make it more expensive for private businesses and individuals to borrow money, often reducing private investment and consumption. Essentially, government borrowing "crowds out" private sector activity, potentially slowing economic growth. This phenomenon highlights a trade-off: while government spending can stimulate the economy in the short term, excessive borrowing may hinder private sector expansion over time.