6.7 Government debt and crowding out

You have discovered that governments can boost aggregate demand either by increasing government spending or through cutting taxes. There is, however, an elephant in the room, which you must have noticed, and this section has so far studiously ignored (just to keep things simple): how can a fiscal stimulus be paid for? Surely if the government spends more to get the country out of a crisis, it runs the risk of squeezing the private sector, or even worse, bankrupting itself. These two issues are considered first by looking at government debt, before turning to a consideration of how the private sector can be squeezed by government spending.