Berheim, A Neoclassical Perspective on Budget Deficit

In the year 1988 presidential campaign, virtually every serious candidate spoke of the urgent need to trim government budget deficits. Public opinion polls have identified federal deficits as a key economic issue, second only to unemployment. While many economists are relieved by what they perceive to be a long overdue political response to a critical economic problem, others regard the fuss as much ado about nothing. It is indeed remarkable that economists can disagree so severely over an issue which commands such a uniform reaction from laymen of widely different ideologies and political affiliations.
Generally speaking, there are three schools of thought concerning the economic effects of budget deficits: Neoclassical, Keynesian, and Ricardian. Before proceeding further, it is useful to review the basic structure and implications of each paradigm. The Neoclassical paradigm envisions farsighted individuals planning consumption over their own life cycles. Budget deficits raise total lifetime consumption by shifting taxes to subsequent generations. If economic resources are fully employed, increased consumption necessarily implies decreased saving. Interest rates must then rise to bring capital markets into balance. Thus, persistent deficits "crowd out" private capital accumulation. In the current economic environment, most economists would agree that these consequences would be highly detrimental.

According to the Neo-Classical School, increases in budget deficits cause increases in the rate of intreasts.
Thus, budget deficits "crowd out" private spending since the private sector will borrow less at higher interest rates.