A Fiscal Policy Framework to Safeguard Public Investment

Abstract

Fedelino and Hemming analyse different choices of fiscal indicators and targets that are better suited to promoting and safeguarding public investment. After having documented the decline in public investment as a share of GDP in many countries over the last two decades, they note that the empirical evidence on the links between public investment and growth has so far been inconclusive and, furthermore, there is no guarantee that public investment is especially meritorious or productive. The Authors thus propose several “public investment-friendly” approaches to fiscal policy without abandoning the traditional framework based on overall balance and gross debt: broadening the usual set of fiscal indicators and targets, by paying more attention to the current balance; introducing more budgetary flexibility; strengthening the institutional framework for public investment; promoting private sector involvement. They conclude that the best solution to protecting public investment is to implement fiscal policy in a flexible, sustainable and transparent way.