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Walking Up the Down Escalator: Public Investment and Fiscal Stability


William Easterly


New York University - Department of Economics

Timothy Irwin


World Bank

Luis Servén


World Bank - Office of the Chief Economist; World Bank - Development Research Group (DECRG)

March 1, 2007

World Bank Policy Research Working Paper No. 4158

Abstract:     
Fiscal adjustment becomes like walking up the down escalator when growth-promoting spending is cut so much as to lower growth and thus the present value of future tax revenues to a degree that more than offsets the improvement in the cash deficit. Although short-term cash flows matter, a preponderant focus on them encourages governments to invest too little. Cash flow targets also encourage governments to shift investment spending off budget, by seeking private investment in public projects-irrespective of its real fiscal or economic benefits. To evade the action of cash flow targets, some have suggested excluding from their scope certain investments (such as those undertaken by public enterprises deemed commercial or financed by multilaterals). These stopgap remedies might sometimes help protect investment, but they do not provide a satisfactory solution to the underlying problem. Governments can more effectively reduce the biases created by the focus on short-term cash flows by developing indicators of the long-term fiscal effects of their decisions, including accounting and economic measures of net worth, and where appropriate including such measures in fiscal targets or even fiscal rules, replacing the exclusive focus on liquidity and debt.

Number of Pages in PDF File: 38

Keywords: Public Sector Expenditure Analysis & Management, Public Sector Economics & Finance, Investment and Investment Climate, Economic Stabilization, Fiscal Adjustment

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Date posted: March 8, 2007  

Suggested Citation

Easterly, William and Irwin, Timothy and Servén, Luis, Walking Up the Down Escalator: Public Investment and Fiscal Stability (March 1, 2007). World Bank Policy Research Working Paper No. 4158. Available at SSRN: http://ssrn.com/abstract=969235

Contact Information

William Easterly (Contact Author)
New York University - Department of Economics ( email )
269 Mercer Street
New York, NY 10003
United States
Timothy Irwin
World Bank ( email )
1818 H Street, N.W.
Washington, DC 20433
United States
Luis Servén
World Bank - Office of the Chief Economist ( email )
Washington, DC 20433
United States
202-473-7451 (Phone)
202-522-3518 (Fax)
HOME PAGE: http://www.worldbank.org/research/bios/lserven.htm
World Bank - Development Research Group (DECRG)
1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
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