Public Investment and Supply

The aim of this project is to investigate quantitatively the link between public investment and productivity growth. When the Office for Budget Responsibility (OBR) is asked to assess the sustainability of a given fiscal plan, it is typically asked to do so over a relatively short horizon. As a result, the OBR will only consider the demand effects of the plan, since the effects on potential output – whether or not they are material – would typically take longer to come through than the horizon they are using to assess whether the government will meet its fiscal rules. And, given that demand effects are short lived, an increase in government spending (absent tax rises) would eventually lead to a rise in the debt to GDP ratio. Hence, the absence of a link from fiscal policy (public investment in particular) to the supply side will act to incentivise governments to scale back on public investment in order to hit their debt and deficit targets.

As a result, levels of public investment in the United Kingdom have been low by historical and international standards (comparable, advanced economies) since the late 1970s. But, higher public investment can boost economic growth through a fiscal multiplier that increases over time and by unlocking private investment. This means that an increase in public investment could actually lead to a lower debt to GDP ratio in the long run.

This work will contribute to the literature on the effects of public investment by concentrating specifically on the link to private investment and productivity. Although, much work has been done looking at the effects of particular investments by the public sector, to the best of my knowledge, the links between public and private investment and productivity remains a relatively under-researched area.